US: Swift fall in inflation will allow the Fed to cut rates in 2023 – ING

In the view of economists at ING, recession will accelerate inflation's slide and allow the Federal Reserve to respond with rate cuts before 2023 is out.

Recession risks mount as businesses pull back

“We're likely to see the jobs market and the outlook for business capital expenditure deteriorate markedly over the next couple of quarters. While the US entered a technical recession in the first half of 2022, this was tied to legacy supply chain issues which led to volatility in trade and inventories. A recession will feel much more ‘real’ this time around.”

Inflation set to hit 2%

“Corporate pricing power already appears to be waning based on survey evidence. The deteriorating activity story will help dampen price and wage pressures further. The composition of the US inflation basket, which is heavily skewed toward housing and vehicles – accounting for more than 40% by weight – is also important for our call that inflation will hit 2% by the end of the year.”

The Fed will respond early and fast with rate cuts

“With the Fed continuing to suggest the risk of doing too little outweighs the risk of doing too much, it appears prepared to accept a recession to ensure inflation is defeated. Given this situation, there is some upside risk to our forecast of 100 bps of rate hikes from here on. But given the prospect of recession and sharply lower inflation, the Fed will be in a position to cut interest rates in the second half of the year.”