There's a 55% chance of a recession in 2023, chief economist says - but inflation data will determine if the Fed stays aggressive and sparks a downturn

• CPI data publishes on Thursday, and it will hold key implications for how aggressive the Federal Reserve is with interest rates moving forward.
• One economist said he's expecting inflation to ease slightly, which could lead the Fed to a 50 basis-point rate hike in December.

The US is facing a 55% probability of a recession thanks to the Federal Reserve's aggressive interest rate hikes, but Thursday's October CPI data could alter that outlook, according to a chief economist.

Wilmington Trust's Luke Tilley, who is also head of asset allocation and quantitative services, told Insider he's expecting new data to show that inflation has eased slightly, and that his firm's prediction is below consensus.

According to Bloomberg, the median estimate for CPI month-over-month is 0.6%, while year-over-year is 7.9%. That would represent a decline from September's 8.2% reading.

For Core CPI month-over-month, which is what Tilley said he'll be eyeing, the median estimate is 0.5%.

"What it's really going to come down to is the Core reading, so excluding food and energy," Tilley said. "Last month was 0.6%, tomorrow expected 0.5%, and anything below that is going to play toward reducing the Fed's hike at the next meeting. So if it comes in below 0.5%, that encourages a 50-basis-point hike in December, and anything above that will push toward a 75-basis-point move."

While Wall Street remains mixed on whether policymakers will opt for a fifth consecutive 0.75 point move, traders are currently betting on greater odds of a half-point hike.

Soaring inflation has put the Fed on its most hawkish campaign since the 1980s, and the still-hot labor market poses additional challenge for policymakers. That aggression, however, could end up tipping the economy into a downturn.

As of now, Tilley noted his firm expects a recession to be more than likely for 2023, although Thursday data could alter that prediction.

"We have this week established a mild recession for next year as our baseline outlook, 55% probability," he said. "The reading tomorrow influences that. If Core inflation comes in greater than 0.5%, the Fed will raise rates more and we would be reevaluating the probability of a recession, and probably raising it higher."

Meanwhile, JPMorgan analysts said Wednesday that a surprise, steep drop in inflation could boost stocks, and tame the bond market.

"Seeing a stepdown in inflation of this magnitude likely pulls the 10-Year yield below 4% (currently 4.158%) and triggers a sharp rally in stocks," the bank's analysts wrote in a note. "This may also reset the yield curve lower with terminal rate expectations falling under 5%."