American investor and Scion Asset Management founder Michael Burry projected a recession and another sharp rise in inflation in the United States this year.
Burry took to Twitter to say that while inflation "has peaked," the pattern will most likely repeat itself as the economy weakens and the Federal Reserve begins to lower interest rates.
"We are likely to see the CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike. It's not hard," he tweeted.
According to FOX Business, inflationary pressures have pressed the Fed to increase interest rates at the fastest rate since the 1980s. This risks reducing consumer and business expenditure by raising the borrowing cost.
Recession lurking in 2023
In 2022, legislators had already authorized seven consecutive rate hikes — generating the federal funds rate to a range of 4.25 percent to 4.5 percent, the highest level since 2007, and forecasting a peak rate of around five percent.
Regardless of early signs that prices are slowing down, Fed chairman Jerome Powell insisted the central bank has much to do to fight inflation.
"The inflation data in October and November show a welcome reduction," Powell told reporters. "But it will take substantially more evidence to give confidence that inflation is on a sustained downward path."
Following the Federal Open Market Committee's meeting on December 13-14, officials released new forecasts showing that inflation would be higher in 2023 than initially predicted. This resulted in an unexpected amount of support in projections for the idea that interest rates would need to rise above 5 percent by 2023.
Unemployment rate outlook
They also predicted that economic growth would slow dramatically this year. For example, unemployment will rise significantly to 4.6 percent — and remain high for the next two years as interest rate hikes push the U.S. into a recession.
Ahead of the December 13-14 meeting minutes release on Wednesday, chief U.S. economist for Bloomberg Economics Anna Wong said it would "show that it was concern about the labor market not cooling fast enough."
Wong said this concern prompted 17 of the 19 FOMC members to write down a terminal rate above 5 percent "in the updated dot plot."
"That would be a sharp turnaround from the dovish November minutes, which showed several policymakers opining on the risks of overtightening."
As the U.S. Labor Department's monthly jobs report will be out on Friday, a Bloomberg poll revealed that forecasters predicted the report to show that employment growth slowed to 200,000 last month.
"No matter how you slice the labor market, it is strong. That is what got people exercised."
Mark Spindel, chief investment officer at Chicago-based MBB Capital Partners LLC
"No matter how you slice the labor market, it is strong," chief investment officer at Chicago-based MBB Capital Partners LLC Mark Spindel commented.
Goldman Sachs, Deutsche Bank and Bank of America include some of the major Wall Street firms estimating a decline next year. However, they are still unsure of its severity.
Despite the forecasts, Powell has argued against the certainty of a recession. He suggested that lower inflation prints could increase the likelihood of a soft landing, which reports described as "the sweet spot" between containing inflation and slowing growth.
"To the extent we need to keep rates higher and keep them there for longer and inflation moves up higher and higher, I think that narrows the runway," Powell said.
"But lower inflation readings, if they persist, in time could certainly make it more possible. I don't think anyone knows whether we're going to have a recession or not, and if we do, whether it's going to be a deep one or not. It's not knowable."
Investors now anticipate that the Fed will resume normal-sized quarter-point rate increases at its next policy meeting on January 31-February 1, 2023. According to futures contracts, they also expect the federal funds rate to soar just below five percent around mid-year.
"The inflation forecast being raised was surprising because it sounded like most economists on the street were expecting very little change there, and I was expecting them to cut their forecast."
Kevin Cummins