Which recession? The continued strength of the economy poses big questions for the Fed

Employers are hiring quickly. House prices are rising nationwide after months of decline. Consumer spending rose more than expected in a recent data release.

The US economy is not experiencing the drastic slowdown many analysts had expected in light of the Federal Reserve’s 15-month, often aggressive campaign to slow growth and contain rapid inflation. And that surprising resilience can be both good and bad news.

The endurance of the economy could mean that the Fed will be able to manage inflation gently, curbing price increases without sending America into any kind of recession. But if companies can keep raising prices without losing customers on solid demand, inflation could remain too high, forcing consumers to pay more for hotels, food and childcare and forcing the Fed to do even more to curb growth. to brake.

Policymakers may need time to work out which scenario is most likely so they can avoid overreacting and causing unnecessary economic pain, or underreacting and allowing rapid inflation to become permanent.

Given that investors are betting that Fed officials will skip a rate hike at their June 13-14 meeting before lifting again in July, they are proceeding with caution, emphasizing that pausing does not mean stopping — and that they remain determined to control prices. But even that expectation is increasingly shaky: markets have spent this week pushing up the likelihood that the Fed will raise rates this month.

In short, mixed economic signals could make Fed policy discussions fraught in the coming months. Here’s where things stand.

The interest is much higher.

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

After making major policy adjustments over the past 15 months, key officials including Fed chairman Jerome H. Powell and Philip Jefferson, President Biden’s choice to become the next Fed vice chairman, have hinted that central bankers could be pausing to give itself time to assess how the increases affect the economy.

But that assessment remains complex. Even some parts of the economy that typically slow down when the Fed raises rates show a surprising ability to withstand current interest rates.

“It’s a very complicated, convoluted picture depending on what data points you look at,” said Matthew Luzzetti, chief US economist at Deutsche Bank, noting that overall growth numbers like gross national product have slowed down – but other key numbers are holding up.

House prices fluctuate.

Higher interest is possible take months or even years to have their full effect, but they should theoretically work pretty quickly to slow down the auto and housing markets, both of which revolve around big purchases with borrowed money.

That story is complicated this time. Buy a car is delayed since the Fed started raising rates, but the auto market has been so undersupplied in recent years — thanks in large part to pandemic-related supply chain issues — that the cooling has been bumpy. Housing has also baffled some economists.

The housing market weakened considerably last year due to high mortgage interest rates. But rates have recently stabilized and home prices have risen again amid low inventory. House prices don’t factor directly into inflation, but their reversal is a sign that it takes a lot to sustainably cool a hot economy.

Job signals are confusing.

Fed officials are also watching for signs that their rate hikes are trickling through the economy to slow the labor market: As it costs more to fund expansions and as consumer demand slows, companies are having to hire fewer workers. With less competition for workers, wage growth should moderate and unemployment should rise.

Some signs suggest that the chain reaction has begun. People are working fewer hours per week with private employers, suggesting bosses aren’t trying to get as much out of existing staff.

But other signals have stalled more. There were vacancies come down, but went up again in April. Wages have been climb less quickly for lower-income workers, but profits remain abnormally fast. The unemployment rate rose from 3.4 percent to 3.7 percent in May, but even that is still a long way from the 4.5 percent Fed officials expected in their latest economic forecasts by the end of 2023. Officials will next week release new projections.

And according to some measures, the labor market is still chugging. Letting remains particularly strong.

“Everyone talks as if the economy is moving in a straight line,” said Nela Richardson, chief economist at ADP. “In reality, it’s lumpy.”

Price increases are persistent.

Still, inflation itself is perhaps the biggest wild card that could shape the Fed’s plans this month and this summer. Officials predicted in March that annual inflation, as measured by the Personal Consumption Expenditures Index, would fall to 3.3 percent by the end of the year.

That relapse happens gradually. 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 assessment for May on the first day of their meeting next week on the first day of their meeting.

Economists expect a substantial cooling, which could give officials confidence in pausing rates. But if those predictions are foiled, it could lead to an even more heated debate about what comes next.