The Staying Power of the US Economy Has Big Questions for the Fed

The Staying Power of the US Economy Has Big Questions for the Fed

Employers are hiring fast. Home prices are rising nationally after months of decline. Consumer spending climbed more than expected in a recent data release.

The US economy is not experiencing the deep recession many analysts had expected in light of the Federal Reserve’s 15-month, often aggressive campaign to put the brakes on growth and bring rapid inflation under control. And that surprising flexibility can be either good or bad news.

The staying power of the economy could mean that the Fed will be able to gradually reduce inflation, slowing price increases without plunging the US into any kind of recession. But if companies can continue to raise their prices without losing customers amid solid demand, it could keep inflation hot – forcing consumers to pay more for hotels, food and child care. And could force the Fed to do even more to curb growth.

Policymakers may need time to determine which scenario is more likely, so that they avoid overreacting and causing unnecessary economic pain, or minimizing and allowing rapid inflation to become permanent. Can

Given that, investors are betting that Fed officials will abandon rate hikes at their meeting on Tuesday and Wednesday before raising them again in July, moving cautiously to emphasize that pausing does not mean abandoning Means not – and they are determined to get prices under control. , But even that hope is increasingly volatile: Markets have spent this week bemoaning the prospect that the Fed could raise rates at this month’s meeting.

In short, mixed economic signals could cloud Fed policy discussions in the coming months. This is where things stand out.

Interest rates are above 5 percent, their highest level since 2007.

After sharply adjusting policy over the past 15 months, key officials such as Jerome H. Powell, the Fed chair, and Philip Jefferson, President Biden’s pick to become the next Fed vice chair, have indicated that the central banker can Pause to give yourself time to assess how the increase is affecting the economy.

But that assessment remains a complex one. Even parts of the economy that typically slow down when the Fed raises rates are demonstrating a surprising ability to withstand today’s interest rates.

“It’s a very complex, tangled picture, depending on which data points you look at,” said Matthew Luzetti, chief US economist at Deutsche Bank. Gross Domestic Product has slowed — but other key numbers hold up.

May have higher interest rates take months or even years To have their full impact, however, theoretically they should act very quickly to slow the car and housing markets, both of which revolve around large purchases made with borrowed cash.

That story gets complicated this time around. buy a car has slowed down But the auto market has been so short supplied in recent years since the Fed started raising rates — thanks in large part to supply chain problems linked to the pandemic — that the cool-down has been a bumpy one. Housing has surprised even some economists.

The housing market markedly weakened last year as mortgage rates soared. But Rates have stabilized recently, and home prices have ticked up amid low inventory. House prices don’t directly factor into inflation, but their metamorphosis is a sign that much remains to be done to permanently cool an overheated economy.

Fed officials are also watching for signs that their rate hikes are trickling through the economy to counter a slowing job market: As it spends more to expand and consumer demand slows, companies may need to hire. You should step back from keeping it. Wage growth should moderate and unemployment should rise, amid less competition for workers.

Some signs indicate that a chain reaction has begun. Initial claims for unemployment insurance last week reached their highest level since October 2021, a report showed on Thursday. People are also working fewer hours per week at private employers, which suggests that bosses are not trying to extract as much from existing employees.

But other signals are more stalled. had job openings decision making, But rose back in April. wages are due slow climb For low-income workers, however, gains remain unusually sharp. The unemployment rate rose to 3.7 percent from 3.4 percent in May, but it was still well below the 4.5 percent Fed officials expected to hit by the end of 2023 in their latest economic forecasts. Officials will release new estimates next week.

And by some measures, the labor market is still reeling. Hiring remains particularly strong.

“Everyone talks as if the economy moves in a straight line,” said Nella Richardson, chief economist at the ADP. “Actually, it’s lumpy.”

Still, inflation itself could be the biggest wild card shaping the Fed’s plans this month and into this summer. Officials forecast in March that annual inflation as measured by the personal consumption expenditure index would ease to 3.3 percent by the end of the year.

That pullback is happening slowly. Inflation was 4.4 percent in April, down from 7 percent last summer but still more than double the Fed’s 2 percent target.

Officials will receive a related and more up-to-date inflation reading for May – the Consumer Price Index – on the first day of their meeting next week.

Economists expect a substantial cooling off, which could give authorities the confidence to hold rates. But if those predictions are thwarted, what happens next could spark even more heated debate.

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