Page 12 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

The Road Ahead For The U.S. Economy

Eugenio J. Alemán, PhD, Chief Economist, Raymond James
Giampiero Fuentes, Economist, Raymond James

The current decade was dubbed by many as the ‘new
Roaring '20’s. However, as we stated in our presentation of
May 2021, “It would be unlikely as there are significant psy- Our view is that the Fed will need two years to
chological, demographic, and structural dynamics that bring inflation back down, but this process
suggest the unfettered elevated growth trajectory of the started earlier this year, so we are probably
1920s will not be duplicated in the upcoming decade.” In halfway to achieving low and stable prices.
fact, in just three years the world has experienced a global
pandemic, a recession, and many countries are likely to
experience another recession in 2023 due to efforts by cen- by a further 50 basis points until March of 2023, taking the ter-
minal federal funds rate for this cycle to 4.75% to 5.00%. By
tral banks to bring down inflation rates. increasing the federal funds rate, the Fed is trying to slow down

the rate of growth of the economy, starting from the most interest
Although 2022 started with positive expectations for a fully reo-
pened economy, plus the view that inflation was transitory and rate-sensitive sector, investment, in the hopes of weakening the
that it would start turning the corner in the second quarter, the U.S. job market.
year was far from positive. Just before the end of the first quarter Although a federal funds rate of 4.75% to 5.00% is not very high
the invasion of Ukraine by the Russian military, and the start of historically, it is very high compared to what markets and inves-
the war severely impacted energy and food prices globally. Addi- tors have seen over the last several decades. Thus, the biggest
tionally, still-strained supply chains, the large accumulation of problem today is that economic actors (i.e., individuals, busi-
savings during the pandemic, and a strong labour market made it nesses, the external sector as well as the U.S. government) are
impossible for inflation to come back down. This triggered a very trying to adjust to these new levels of interest rates. And the way
strong response from the Fed, which increased the federal funds in which these economic actors adjust to higher interest rates will
rate by 425 basis points in 2022 and is expected to increase rates determine the economy’s path forward in 2023.

12