Interest Rates to Rise, Inflation to Slow
Economic growth will slow relative to last year’s robust pace but remain above long-run potential, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. The EAC consensus forecast also anticipates softer but still elevated inflation in 2022 along with three interest rate increases from the Federal Reserve.
The committee made up of 16 chief economists from some of North America’s largest banks forecasts economic growth to slow from an inflation-adjusted 5.5% pace last year (Q4 over Q4) to 3.3% this year and 2.3% in 2023.
The group expects the post-omicron economy to spur continued gains in employment this year, driving the unemployment rate lower.
“We are knocking on the door of full employment,” said Ellen Zentner, managing director and chief U.S economist at Morgan Stanley and the current committee chair.
The bank economists expect the national unemployment rate to decline from 3.9% at present to 3.5% at year-end. Job gains averaging near 550,000 monthly last year are seen slowing to a still-vigorous 280,000 this year. Labor force participation will also see continued recovery as pandemic-driven impediments recede.
“The tight labor market continues to drive wage gains across all income segments, which will encourage more people to go back to work,” said Zentner. “More jobs with rising wages will ensure the consumer remains the bulwark of our economy in the year ahead.”
Average hourly earnings are expected to remain in a 4.5%-to-5.0% range this year and next, according to the group.
The bank economists see business investment as the strongest component of the current rebound. The consensus forecast is for capital spending to grow about 5% in 2022, following a nearly 7% increase last year.
“Higher wages along with low-cost financing have spurred investment in technology and increased efficiency,” said Zentner. “Firms are also beginning to replenish depleted stocks as bottlenecks in supply chains diminish.”
The committee expects a big swing in inventory accumulation, from down nearly $70 billion last year to up around $90 billion this year and next.
The expected resolution of supply chain issues should allow for inflation to slow substantially from its 6.7% increase in 2021 to a still-elevated 3.0% this year and 2.4% in 2023 on a Q4-over-Q4 basis. Inflation measured by the core personal consumption expenditures index preferred by the Federal Reserve is expected to decline from 4.5% last year to 2.7% this year.
With the economy approaching full employment and inflation above its 2% long-term average goal, the Federal Reserve’s mandates have been met so that it can begin to reverse monetary accommodation in measured steps, according to the committee. The mean forecast is for the current 0-25 basis point target zone for the federal funds rate to be raised by 25 basis points three times this year beginning in March. The group also expects the Fed to begin running down its balance sheet of long-term U.S. Treasury and federal agency bonds around mid-year.
“Inflation surprises and labor market tightening necessitate an appropriate response from the Federal Reserve,” said Zentner.
The 10-year Treasury bond rate will rise from 1.7% now to 2.1% later this year and 2.2% next year, according to the committee. Correspondingly, the 30-year, fixed-rate mortgage interest rate is predicted to rise from 3.2% at present to 3.7% later this year.
Vigorous home price increases are expected to continue, driven by mortgage rates remaining low by historical standards, a dearth of housing stock, and resilient household incomes. The bank economists predict the national average home price to rise about 7% this year on top of a nearly 19% increase in 2021.
“While we recognize early-year COVID-19 drags and the gradual removal of monetary and fiscal policy accommodation, we expect the economy to display resiliency and growth to remain above trend,” said Zentner.
View detailed EAC forecast numbers.
The members of the 2022 ABA Economic Advisory Committee are:
- EAC Chair Ellen Zentner, managing director and chief U.S economist, Morgan Stanley, New York.
- Scott Anderson, EVP and chief economist, Bank of the West/BNP Paribas, San Francisco;
- Scott J. Brown, SVP and chief economist, Raymond James Financial, St. Petersburg, Fla.;
- Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
- Richard DeKaser, EVP and chief corporate economist, Wells Fargo & Co., Washington;
- Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
- Ethan Harris, managing director and head of global economics, Bank of America Securities, New York;
- Peter Hooper, managing director and global head of economics, Deutsche Bank Securities Inc., New York;
- Tendayi Kapfidze, SVP and chief economist, U.S. Bancorp, New York;
- Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;
- Christopher Low, chief economist, FHN Financial, New York;
- Simona Mocuta, managing director and chief economist, State Street Global Advisors, Boston;
- George Mokrzan, director of economics, Huntington Bancshares, Inc., Columbus, Ohio;
- Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Alabama;
- Doug Porter, managing director and chief economist, BMO Financial Group, Toronto; and
- Carl Tannenbaum, EVP and chief economist, The Northern Trust Company, Chicago.