Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

'The Fed has to do the dirty work' and induce a US recession that's deeper than Europe's as the economy is clearly overheating, BofA says

'The Fed has to do the dirty work' and induce a US recession that's deeper than Europe's as the economy is clearly overheating, BofA says

"If the Fed wants to get labor cost inflation under control in a timely manner, we think it needs to engineer about a 2% rise in the unemployment rate."
The Federal Reserve faces the difficult task of cooling down a searing-hot labor market, and aggressive rate hikes will ultimately tip the US economy into a deeper recession than what Europe will likely see, according to Bank of America. 

Because Europe had a less rapid recovery from the pandemic compared to the US, Europe's GDP has less room to fall, BofA said, adding that the eurozone still hasn't fully recovered from the recession with hours worked far below pre-pandemic levels and wage growth only inching higher.

"Europe does not need to cool off its labor market to get inflation down," analysts wrote in a note Friday. "By contrast, the Fed has to do the dirty work of bringing labor demand down and in line with labor supply. Adding to the challenge is the fact that pent-up demand for labor in the US is making it very hard to cool off the labor market. So the Fed has to deal with both the risk of second-round effects and the first-round effect of an overheating labor market."

The strength of the US labor market was on display Friday, when the Labor Department reported nonfarm payrolls increased by 261,000 in October, above expectations, while unemployment rose to 3.7%, above the expected 3.5%. 

BofA analysts said the US economy is "clearly overheating," particularly the labor market, as robust wage growth shows few signs of easing.
The jobs data opens the door for the Fed to stay aggressive with its rate hikes, even after it made its fourth consecutive 75-basis-point increase on Wednesday. The fed fund rate now sits at 3.75% to 4%.

BofA now sees the Fed eventually hiking the benchmark rate to 5.25%, up from its previous prediction for 4.75% to 5%, while the European Central Bank's terminal rate will be 2.5%. 

"If the Fed wants to get labor cost inflation under control in a timely manner, we think it needs to engineer about a 2% rise in the unemployment rate," the note said.

As a result, analysts see the US economy shrinking at an annualized pace of 1.5% in the first three quarters of next year. The eurozone is seen contracting by 1.2% and 1.6% over the two winter quarters, then rebounding to trend-like growth of roughly 1% over the remainder of next year.

To be sure, Europe faces significant downside risks that could change the outlook, such as the prospect of further natural gas supply cuts from Russia as well as uncertainty from upcoming sanctions on Russian oil.  

"We can't rule out additional shocks to the energy market, due to additional supply disruptions," BofA said. "Europe is vulnerable to confidence shocks if the war in Ukraine escalates. And Europe is quite vulnerable to a colder-than-normal winter."
AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Cardinal Robert Prevost Elected as Pope Leo XIV, Marking a Historic Papacy
India-Pakistan conflict may be first test for Chinese military tech
Bill Gates Announces Plan to Wind Down Philanthropic Foundation and Disperse Wealth
Historic Papal Conclave Set to Commence in Rome
“Trump Supporter” Aims to Bring a MAGA-Style Shift to Romania
Common Sense Returns to Britain's Legal System: UK Supreme Court Declares a Woman Is… a Woman
EU Hits TikTok with €530 Million Fine Over China Data Transfers
Beijing Says U.S. Is ‘Reaching Out’ for Tariff Talks Amid Soaring Trade Tensions
Warren Buffett to Step Down as Berkshire CEO After Nearly 60 Years
Trump Shares AI-Generated Image of Himself as… Pope, Prompting Outrage Reaction
Germany's Alternative für Deutschland (AfD) party has now been officially labeled “right-wing extremist” by the federal office for the so-called “protection of the constitution.”
Amazon Launches Satellite Internet Service Amidst Competition with SpaceX
Transformative Changes in Women's Wrestling: The Rise of WWE Superstars
The Rush to the White Gold: Global Investment Surge in Natural Hydrogen Exploration
This is a day in Spain without electricity and internet
Trump Administration Removes National Security Adviser Mike Waltz Amid Signal Chat Controversy
U.S. Economy Shrink in Trump’s First Quarter as Tariff Policy Raises Questions
U.S. and Ukraine Poised to Sign Strategic Critical Minerals Deal Amid Geopolitical Shifts
Spain Restores Power After Unprecedented Nationwide Blackout
Liverpool Clinches Record-Equalling 20th English League Title Under Arne Slot
How do you fix this culture?
Corrupted from Within: How Deep State Power and Unelected Judges Hijacked Democracy Against the Will of the People
President Trump and Ukrainian President Zelensky just held an impromptu discussion on the sidelines of Pope Francis' funeral in Rome.
World Leaders Gather in Rome for Pope Francis's Funeral
Pope Francis Laid to Rest in Rome as World Leaders Attend Funeral
Not Child’s Play: How Competitive Gaming Became a Global Economic Empire
California Surpasses Japan to Become the World’s Fourth-Largest Economy
Peter Navarro: The Man Behind Trump’s Tariff Madness
Former U.S. Congressman George Santos sentenced to eighty-seven months for wide-ranging fraud
Pope Francis: head of the Catholic church who pushed for social and economic justice
China do not pay these tariffs - you pay it. This is new 145% tax you pay to the US government.
Cultural Battles in the Vatican: The Candidates in the Battle for the Holy See and Pope Francis's Testament
Global Leaders Pay Tribute to Pope Francis Following His Death
Wild Chimpanzees Observed Bonding Over Alcoholic Fruit
Greek Christians Celebrate Easter in Thessaloníki
US Federal Reserve Chair Issues Warning on Tariff Impact
China, China, China!
Pope Francis Makes Brief Appearance at Easter Sunday Mass
Saudi Arabia Offers Max Verstappen Unprecedented Deal to Join Aston Martin
Global Pistachio Shortage Amid Rising Demand for 'Dubai Chocolate'
Trump is assembling a coalition of Western leaders aligned with the MAGA vision, strengthening a unified front for global change
IMF Predicts No Global Recession Amid Trade Tensions
Alphabet Faces Antitrust Setbacks as Federal Judges Rule Against Google
US Billionaires Call for Higher Taxes, but Proposed 'Millionaires Tax' May Not Achieve Desired Outcome
This is Vienna, Austria in 2025.
Designed in US, made in China: Why Apple is stuck in tariff tussle
Boeing Jet Returns to US from China Amid Tariff War
US Sets Deadline for Russia-Ukraine Peace Deal Brokerage
Italy Introduces 'Sex Rooms' in Prisons for Inmates
Italian Prime Minister Giorgia Meloni Meets with Donald Trump to Discuss EU-US Trade Tensions
×