Jun 15, 2023 - Economy

The Fed grows confident its Goldilocks scenario might come true

Illustration of a paper airplane made of out of a dollar flying on a looping path

Illustration: Sarah Grillo/Axios

The economy just might be able to avoid the painful slump that Federal Reserve officials warned could be the unfortunate result of their rate-hiking campaign.

Driving the news: That, at least, is the message that comes through via new forecasts from the central bank that projects a smaller rise in joblessness and faster economic growth than it predicted three months ago.

Why it matters: If they're right, the U.S. may not have to sacrifice the economic gains achieved in the pandemic recovery in order for inflation to recede.

Catch up quick: The Fed held off on raising interest rates, but most officials project at least two more increases by December. Wall Street called it a "hawkish skip."

  • Fed chair Jerome Powell called it a "skip," too, before quickly correcting himself, implying that a rate increase in July is all but a sure thing.

What they're saying: "There is a path to getting inflation back down to 2% without having to see the kind of sharp downturn and large losses of employment that we've seen in so many instances," Powell said in response to a question from Axios at a news conference Wednesday.

  • "It's possible that a strong labor market that gradually cools could aid that along."

By the numbers: As recently as March, Fed officials expected the unemployment rate would rise to 4.5%, by year-end, a full percentage point higher than its level at the time.

  • That projection drew ire from lawmakers on both sides of the aisle, and increases of that magnitude have typically been associated with a recession.
  • New projections show a milder increase in unemployment by the end of 2023: 4.1%, up modestly from the 3.7% rate recorded in May.
  • That came alongside higher projections for economic growth, for GDP to rise 1% in 2023 — moderate growth that's better than the anemic 0.4% estimated in March.

Where it stands: The Fed has raised interest rates by a stunning amount (5 percentage points) in a very short period of time.

  • The economy, however, has proved resilient: Jobs growth is strong, wages are growing quickly and consumers continue to spend at a healthy rate.
  • Powell warned that the full effects of its previous rate hikes "have yet to be felt," since its policy can take a while to flow through the economy. That was the rationale for the Fed taking a break from its campaign of rate hikes yesterday.

The bottom line: There is still a possibility the economy can achieve a soft landing — even with slower-than-expected progress on inflation.

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