Navigating U.S. Labor Market Uncertainty for Economic Stability
In the wake of significant interest rate increases, the economic outlook includes high uncertainty. This is true across economies globally, but it is especially true in the United States, where the Fed has worked hard raising rates to dampen inflationary pressures, some of which have been sticky and stubbornly high. The risk of persistent, elevated inflation is the Fed’s top priority because U.S. government and consumer debt are at record all-time highs. Financing over $30 trillion in government debt is expensive. If high inflation is perceived to be permanent, long-term interest rates could remain elevated, greatly increasing the interest expense to refinance outstanding debt. Such a cascading set of effects would risk reducing potential growth output across the entire economy.
Despite significant interest rate increases, the timeline to get inflation back down to the Fed’s 2% target has been repeatedly pushed further into the future. The delayed abatement of inflationary pressures has prompted the Fed and other central banks to continue tightening monetary policy to a level that has increased downside economic risks.
So, what will the Fed do next? Market participants and economists are struggling to price in the Fed’s next course of action. Some expect rate cuts will come soon, while others look at elevated inflation rates and wonder if the Fed might need to keep rates high and unchanged for a significant period of time. Even a few observers wonder if the Fed may even seek to restrict monetary accommodation further…