Economic Outlook Hinges on Inflation
Everything hinges on inflation
The Fed has a dual mandate to keep the economy at full employment and prices low and stable. While jobs were strong in 2022, inflation has been worryingly high. At the end of 2022, unemployment returned to an impressive pre-COVID low of 3.5%, while inflation remained high but fell to 6.5%. Despite concerns that Fed rate hikes would kill the labor market, the massive number of open, unfilled jobs kept the unemployment rate low and allowed the Fed to raise rates rapidly, pushing inflation lower.
There is hope that inflation will keep falling and may return to 2.5% to 3.5% levels by the end of 2023 or early 2024. Of course, if jobs weaken, the Fed could take a more accommodative policy stance. But no matter what the monthly changes are, unemployment and inflation will continue to set the economic, financial market and monetary policy tone for the rest of the year. We expect inflation to ease significantly further year-on-year, while we also expect the risk that the unemployment rate is likely to rise—but not to a worryingly high level…