The Congressional Budget Office is projecting that the Federal Reserve will manage to rein in inflation without causing economic growth to contract this year.
In a report on the budget and economic outlook Wednesday, the nonpartisan budget office indicated that U.S. real gross domestic product will increase by 3.1% this year. The news is likely to calm the nerves of some investors who are fearing that the United States will fall into a recession because of the central bank’s quickly tightening monetary policy.
The upbeat economic projections came alongside budget estimates that show the government's fiscal health deteriorating. The budget office sees the federal budget deficit shrinking to $1 trillion this year as COVID-19 spending declines, but then sees deficits rising again and averaging $1.6 trillion from 2023 to 2032.
The report found that this year’s economic expansion is being “driven by strong growth in consumer spending and real business investment and by a shrinking U.S. trade deficit.”
Projected GDP growth in 2023 and 2024 was revised upward by the CBO to 2.2% and 1.5%, respectively.
NEW HOME SALES FALL TO PRE-PANDEMIC LEVELS
The CBO report also predicted that inflation has peaked but will take some time to tamp back down to reasonable levels. Consumer prices increased 8.3% for the 12 months ending in April, remaining near the fastest pace in four decades.
The Fed has been jacking up interest rates to slow that price growth, although economists fear it might be doing so with too much gusto and causing GDP to slide. GDP contracted by 1.4% in the first quarter of this year, although most forecasters expect it to increase during this quarter, a scenario that would avoid a recession.
“Inflation will continue to substantially exceed the Federal Reserve’s 2% long-run goal in 2023, CBO projects, before nearing that level the following year,” the budget office said in its Wednesday report.
Still, despite the outlook, the CBO noted that projections about monetary policy and the path of financial conditions are “highly uncertain.”
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
“Financial conditions might tighten more rapidly than CBO anticipates, which would result in a sharp decline in the availability of credit to consumers and businesses and might lead to a recession,” the CBO said.
Goldman Sachs predicts a 35% chance of a recession in the next two years, while Wells Fargo’s economic model projects a 30% chance of a recession occurring in the next six months alone.