Can the fed defeat inflation without a steep recession?
It was the most painful inflation Americans had experienced since 1981, when “The Dukes of Hazzard” and “The Jeffersons” were topping the TV charts. Yet the Federal Reserve now seems on the verge of defeating it — and without the surge in unemployment and the deep recession that many economists had predicted would accompany it.
Inflation has been falling more or less steadily since peaking in June of last year at 9.1%.
The cost of goods has fallen for six straight months.
Housing and rental costs, a major driver of inflation, are growing more slowly. Wage growth has cooled, too, though it still tops inflation.
“I think it’s really good to see the progress that we’re making,” Chair Jerome Powell said at a news conference Wednesday after the Fed’s latest policy meeting.
On Friday, the Congressional Budget Office, a nonpartisan agency, estimated that inflation will drop to 2.1% by the end of next year.
There will likely be bumps on the road toward getting inflation fully under control, officials have said.
Yet many economists, normally a cautious lot, are now willing to declare that inflation is nearly back under control after two-plus years in which it imposed hardships on millions of American households.
Prices spikes are also moderating overseas, with both the Bank of England and European Central Bank keeping their benchmark interest rates unchanged this week.
With inflation cooling, Powell said the 19 officials on the Fed’s
policy setting committee had discussed the prospects for rate cuts at this week’s meeting, projecting that the Fed will cut its key interest rate three times next year.
That stance marked a drastic shift from the rate-hiking campaign the Fed began in March 2022. Beginning then, the central bank raised its benchmark rate 11 times, from near zero to roughly 5.4%, its highest level in 22 years, to try to slow borrowing, spending and inflation.
The Fed’s rate-cut projections, sent stock market indexes soaring this week. Wall Street traders now foresee a roughly 80% likelihood that the first rate cut will occur when the Fed meets in March, and they are forecasting a total of six cuts in 2024.
The week’s events represented a departure from just two weeks
ago, when Powell had said it was “premature” to say whether the Fed had raised its key rate high enough to fully conquer high inflation.
Recent data appeared to have helped shift Powell’s thinking. On Wednesday, a measure of wholesale prices came in lower than economists had expected.
Powell said some Fed officials had even updated their economic projections on Wednesday, not long before they were issued, in light of the lower-than-expected wholesale price report.
The economy keeps growing, defying widespread fears from a year ago that 2023 would bring a recession. A report on retail sales Thursday showed that consumers grew their spending last month, likely encouraged by increased discounting that will also lower
inflation.
Economists credit the Fed’s rapid rate hikes for contributing to inflation’s decline. In addition, a recovery in global supply chains and a jump in the number of Americans — and recent immigrants — searching for jobs have helped cool the pace of wage growth.
Still, a continued decline in inflation isn’t guaranteed. One wild card is rental prices. Realtime measures of new apartment leases show those costs rising much more slowly than they did a year ago. It takes time for that data to flow into the government’s figures. In fact, excluding what the government calls “shelter” costs — rents, the cost of homeownership and hotel prices — inflation rose just 1.4% last month from a year earlier.