The Federal Reserve has been attempting to control a 9.0% annual inflation rate in March of 2022 with seven successive rate increases. While this has been effective, it could be more of a sledgehammer than a scalpel in cooling off the economy and combating inflation. If the Fed raises rates too slowly, inflation could continue to rage on, while too fast could push the economy into a recession with unemployment skyrocketing.
There is disagreement among economists as to whether the Federal Reserve has increased interest rates too quickly and too steeply. The current 6.5% inflation rate is still well above the Fed’s target of 2%–3% and additional Fed interest rate hikes are expected in the first half of this year.
The Federal Reserve is projected to keep increasing rates, so be braced for a certain degree of financial and market instability, particularly during the initial six months of the year. Should inflation persist, interest rates may remain steady and economic growth could be restored.
The Commerce Department published data on Wednesday which showed that retail sales had increased by 3% in January – the highest monthly rise in almost two years. The unemployment rate is also at 3.4%, the lowest since May 1969. Despite this, the decline in the Philly Fed index and the poor momentum in the US housing market is bringing back recession fears among investors. Furthermore, the Producers Price Index was higher than expected, retail sales on Wednesday, and a decline in today's initial jobless claims all point to the fact that the battle to reduce high inflation is far from over, and the Federal Reserve has yet more to do.
In an ideal scenario, inflation keeps trending downward without meaningfully increasing unemployment, prices stabilize and we celebrate avoiding another recession. Lower inflation expectations can help cool inflation and reverse the dynamic, so investors should keep an eye out for any changes in the market-implied Fed path.
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