Investor Michael Burry of "The Big Short" fame has issued a gloomy warning for the U.S. economy: A recession and another inflation spike are almost certainly in the cards in 2023.
The Scion Asset Management chief – who rose to prominence after he successfully predicted the 2008 housing collapse – said on Twitter that while inflation has peaked, it will likely surge again as part of the same cycle once the economy slows and the Fed moves to cut interest rates.
"Inflation peaked. But it is not the last peak of this cycle," Burry said in a tweet on Sunday evening. "We are likely to see the CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike. It's not hard."
Persistent and elevated inflation has pushed the Fed to raise interest rates at the fastest pace since the 1980s, which threatens to curtail consumer and business spending by pushing borrowing costs higher. Policymakers already approved seven straight rate increases in 2022, raising the federal funds rate to a range of 4.25% to 4.5% – the highest level since 2007 – and forecast a peak rate of about 5%.
Fed Chairman Jerome Powell said the central bank has more work to do regarding its inflation-fighting campaign, despite early signs that prices are beginning to cool off.
"The inflation data in October and November show a welcome reduction," Powell told reporters in December at the conclusion of the Fed's policy-setting meeting. "But it will take substantially more evidence to give confidence that inflation is on a sustained downward path."
Officials also indicated that economic growth will slow sharply in 2023 and that unemployment will march substantially higher to a rate of 4.6% as rate hikes bring the U.S. to the brink of a recession. The Fed expects the jobless rate to remain elevated in 2024 and 2025 as steeper rates continue to take their toll on the economy.
The probability of a downturn in 2023 climbed to 70% in December, according to a Bloomberg monthly survey of economists, up from 65% in November. The poll, conducted between Dec. 12-16, surveyed 38 economists.
Bank of America, Goldman Sachs and Deutsche Bank are among the major Wall Street firms forecasting a downturn next year, although they remain uncertain about its severity.
Still, Powell has pushed back against the certainty of a recession, suggesting that lower inflation prints could boost the odds of a soft landing – the sweet spot between curbing inflation without flatlining growth.
"To the extent we need to keep rates higher and keep them there for longer and inflation moves up higher and higher, I think that narrows the runway," Powell told reporters. "But lower inflation readings, if they persist, in time could certainly make it more possible. I don't think anyone knows whether we're going to have a recession or not, and if we do, whether it's going to be a deep one or not. It's not knowable."