Fed predicts big slowdown in economy and rising unemployment as it battles inflation

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The Federal Reserve said on Wednesday that the “pain” Americans are likely to bear from higher US interest rates in 2023 from a weakening economy and rising layoffs and unemployment.

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The central bank raised a key US interest rate that hit borrowing costs for the fifth time this year. The rate hike is aimed at slowing the economy down enough to bring down the highest inflation in 40 years.

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In a keynote speech last month, Fed Chairman Jerome Powell warned the public that it would experience “some pain” as a result of the bank’s more aggressive effort to kick back inflation.

A slowing economy would curb hiring and prompt more layoffs as businesses faced the prospect of slowing sales. The Fed seeks to quell a scorching labor market in which labor shortages are rapidly raising wages and compounding inflation.

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In updated forecasts, the Fed predicts the economy will grow at a 0.2% annual pace this year and shrink by 1.2% next year — well below the outsized 5.7% gain in 2021.

Meanwhile, the unemployment rate is projected to rise to 4.4% in 2023 and remain there until 2024. The current unemployment rate is 3.7%, just above a half-century low.

Historically such a large increase in the unemployment rate foreshadows a pending recession. and a growing number of Wall Street DJIAs,
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Economists expect the US to face a mild recession sometime within the next year.

“With growth slowing further in 2023, sharp Fed tightening this year could trigger an economic slowdown in the next year or so,” said Ben Ayers, senior economist at Nationwide.

Powell and other senior Fed officials acknowledge that a recession is possible, but they are still suggesting publicly that they may pull off a so-called soft landing. This is a Goldilocks scenario in which the economy moves slow enough to contain inflation without triggering a recession.

“I’m optimistic that we’re going to be able to navigate this and keep unemployment at around 4.5%,” Chicago Federal Reserve Chairman Charles Evans said earlier this month.

The result will depend on how much the central bank has to raise the short-term fed funds rate used by banks to determine interest for credit cards, mortgages, auto loans and business loans.

The latest Fed forecast shows the rate rise to 4.4% later this year – higher than most Wall Street forecasts. It will then reach a peak of 4.6% in 2023 before gradually decreasing.

Just six months ago, the Fed’s benchmark rate was close to zero.

Fed officials are united in their belief that the higher cost of money will restore the rate of inflation to pre-pandemic levels of 2% or less by 2025, based on its preferred PCE price index.

The personal consumption expenditure price index rose 6.3% in the 12 months ended August, the highest rate since 1982.

The Fed predicts it will grow to 2.8% by 2023, from 5.4% projected at the end of 2022, to 2.3% by 2024, and to 2% by 2025.

The consumer price index, a better-known measure of inflation, shows an 8.3% increase in prices in the 12 months ended August.

Fed predicts big slowdown in economy and rising unemployment as it battles inflation

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