Monthly economic outlook
November 28, 2022
We believe the Federal Reserve will raise the federal funds target rate to a range of 4.5% to 4.75% by the end of the first quarter and keep it there for the rest of 2023. We expect a recession in the U.S. and growth overall to be in the 0.25% to 0.50% range as the Federal Reserve's rate-hiking cycle will begin to curb employment growth in the first quarter of 2023. The euro area likely will experience a mild recession in the fourth quarter of 2022 and first quarter of 2023.
The points in this article represent the house view of Vanguard’s global economics and markets team as of November 16, 2022.
Our 10-year annualized nominal return projections are shown below. The projections listed below are based on the September 30, 2022, running of the Vanguard Capital Markets Model® (VCMM). Please note the figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income.
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
Source: Vanguard Investment Strategy Group.
IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of September 30, 2022. Results from the model may vary with each use and over time. For more information, see the Notes section.
The Bureau of Economic Analysis reported on October 27 that the economy in the United States grew by an annual rate of 2.6% in the third quarter. This is a solidly positive number, but one that we believe overstates the strength of the U.S. economy.
Near-team recession risk is elevated across major developed markets
Source: Vanguard, as of September 30, 2022.
The euro area and its four largest economies appear to have avoided recession in the third quarter, but the outlook has deteriorated in recent weeks.
A delayed GDP release revealed a surprisingly strong pickup in economic activity in China in the third quarter. The National Bureau of Statistics reported that GDP grew by 3.9% in the third quarter on both a year-on-year and a quarter-on-quarter basis.
We foresee GDP growth of 3.3% in emerging markets in 2023, far stronger than the 0.3% growth rate we see for developed markets. But we expect the pace of growth to vary significantly across regions.
The Fed raised its federal funds target rate by 75 basis points (bps) on November 2 and emphasized that it has more work to do to bring inflation under control. The new target is within a range of 3.75% to 4%.
An anticipated decline in goods prices materialized in the United States in October in a consumer price inflation report that financial markets favored. (Market participants saw the report as evidence that the Fed could slow its pace of rate hikes at its next meeting on December 14.)
The unemployment rate in the United States rose to 3.7% from 3.5% in October, an early sign that Fed interest rates may be starting to take hold.
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All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.