Beyond the Interest Rate Decision: The Federal Reserve’s Projections on Inflation and the US Economy
The recent meeting of the Federal Reserve (Fed) had a crucial element alongside the interest rate decision: its new projections on inflation and the US economy.
These projections are of great interest to everyone. On one hand, we are eager to know when and at what rate the price increase will continue to slow down. On the other hand, we want to understand if the Fed’s efforts to control inflation will weaken the economy and potentially lead to a recession. To address the latter concern, we can examine the new estimates provided by the Fed regarding the performance of the economy for this year and the next.
Is a Recession Anticipated?
The central bank does not foresee a recession in the United States in the short or medium term. However, some experts do not dismiss this possibility due to concerns about the impact of the ten benchmark interest rate hikes and the two additional ones that the Fed is likely to announce this year.
New Projections for Economic Growth
- The Fed now anticipates a 1% growth for the US economy this year, surpassing the previous projection of 0.4% made in March. If this growth materializes, it would solidify the scenario of a “soft landing” where inflation is slowed down without causing an economic contraction.
- For 2024 and 2025, the Fed estimates a slight economic growth of 1.1% and 1.8% respectively. Fed Chairman Jerome Powell justifies this modest growth by stating that slowing down prices will require lower growth than what the US should ideally achieve.
Optimistic Projections for the Labor Market
- The projections for the labor market are also more optimistic. It is worth noting the impressive job creation witnessed in recent times. The unemployment rate is expected to reach 4.1% by the end of the year, lower than the Fed’s previous forecast of 4.5% made a few months ago. The most recent reading for the unemployment rate in May was 3.7%.
Factors Influencing Inflation Slowdown
Considering the improved growth and employment estimates, the question arises: How will inflation continue to slow down? Fed President Jerome Powell addressed this in his recent press conference.
- Powell explained that inflation will continue to moderate its pace due to improvements in supply chain issues caused by the pandemic, a respite in rental prices, and less significant wage increases in the services sector.
- Regarding supply chain problems, Powell stated, “Definitely, supply conditions have substantially improved. However, if you speak to business owners, they will say that things are not yet back to pre-crisis levels.” Therefore, Powell believes there is still room for prices to decrease until these issues are fully resolved.
- Regarding rental prices, Powell mentioned, “We are observing lower levels in rents and new rental contracts. It is only a matter of time before this is reflected in the inflation figure.” This point is crucial as rental prices have the most significant impact on the consumer price index and can significantly influence the direction of inflation.
- In fact, the rental index, also known as the ‘shelter’ component, was the primary driver of the consumer price index (CPI) increase in May, rising by 0.6% compared to April.
- Regarding wages in the service sector, Powell stated, “Many analysts argue that relaxing labor market conditions is crucial for reducing inflation, and we have witnessed progress in that area. We need this trend to continue.”
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