U.S. Economy’s Staying Power Poses Big Questions for the Fed

Employers are hiring rapidly. Home prices are rising nationwide after falling for months. Consumer spending increased more than expected in recent data releases.

The U.S. economy has suffered the kind of drama many analysts expected, given the Federal Reserve’s 15-month long and often aggressive campaign to put the brakes on growth and curb rapid inflation. have not experienced significant slowdowns. And that amazing resilience can be good news or bad news.

The sustainability of the economy could mean that the Fed can moderate inflation and keep prices in check without sending the US into any recession. But if businesses can keep raising prices without losing customers amid strong demand, inflation will become too hot, forcing consumers to pay for hotels, food and childcare, and the Fed will curb growth. may require more effort.

Policy makers have time to determine which scenario is more likely to avoid overreacting and causing unnecessary economic pain or underreacting and perpetuating rapid inflation. may become necessary.

In light of this, investors should expect Fed officials to hold off on rate hikes at their June 13-14 meeting, then resume them in July, and end the moratorium. I expect that it will proceed cautiously while emphasizing that it will not. . But even that forecast is becoming increasingly precarious. Markets have spent this week trying to make the odds of the Fed raising rates at this month’s meeting even a little better.

In short, mixed economic data could make the Fed’s policy debate difficult in the coming months. Here’s the situation:

Interest rates are above 5%, the highest since 2007.

After making significant adjustments to policy over the past 15 months, key officials, including Fed Chairman Jerome H. Powell and President Biden’s nominee for the next Fed Vice Chairman, Philip Jefferson, said central bankers would be the next Fed Vice Chairman. It suggests that he was nominated for can Give us time to stop and judge how the increase will affect the economy.

However, its evaluation remains complicated. Even parts of the economy, which normally slow down when the Fed raises rates, have shown an amazing ability to withstand today’s rates.

“The picture becomes very complicated and convoluted depending on which data points you look at,” said Matthew Rusetti, chief U.S. economist at Deutsche Bank. pointed out that it is. GDP is slowing, but other key numbers are holding up.

When interest rates rise, take months or years To make the most of it, in theory, we need to work pretty quickly to start slowing down the car and housing markets. Both revolve around high-value purchases made with borrowed cash.

This time things got purchase it’s late Since the Fed started raising interest rates, the auto market has been in a rocky cooldown in recent years, largely due to supply chain problems related to the pandemic, which has led to severe shortages of supply. The housing situation has also baffled some economists.

Last year, the housing market suffered a marked downturn due to soaring mortgage rates.but The rate has stabilized recently. House prices are rising again amid low inventories. House prices don’t directly affect inflation, but their turnaround suggests that it will take a long time to cool a overheated economy sustainably.

Fed officials are also watching for signs that rate hikes are spilling over into the economy to slow the job market. Companies should hold back on hiring as expansion costs money and consumer demand is slowing. With less competition for workers, wage growth should moderate and unemployment should rise.

Some signs suggest that a chain reaction has begun. People are working fewer hours per week at private employers, suggesting that bosses aren’t looking to make as much from their existing staff.

But other signals are even more dead.there was a job offer come down, but in April it came back little by little.wages are climb slowly However, the increase is still continuing at an alarming rate. The unemployment rate rose to 3.7% in May from 3.4%, but still well below the 4.5% Fed officials expected the unemployment rate to reach by the end of 2023 in their latest economic forecasts. . Officials are due to release new forecasts next week.

And, by some standards, the labor market is still booming. Employment remains particularly strong.

“Everybody talks like the economy is going in a straight line,” said ADP chief economist Nella Richardson. “It’s really rugged,” she says.

Still, inflation itself could be the biggest wild card that could shape the Fed’s plans this month and this summer. Officials in March expected annual inflation, measured by the Personal Consumption Expenditure Index, to ease to 3.3% by the end of the year.

The backlash is slowly happening. Inflation stood at 4.4% in April, down from 7% last summer, but still more than double the Fed’s 2% target.

Officials will receive relevant and more updated May inflation data (the consumer price index) on the first day of their meeting next week.

Economists expect a sharper economic slowdown could give authorities confidence to stop interest rates. But if those predictions go wrong, there could be even more heated debate about what happens next.

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