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

The “pain” Americans are likely to suffer from higher US interest rates is a sluggish economy in 2023 and rising layoffs and unemployment, the Federal Reserve predicts.

The central bank on Wednesday raised a US interest rate for the fifth time this year, affecting the cost of borrowing. The rate hikes are expected to slow the economy enough to bring down the highest inflation in 40 years.

In a major speech last month, Fed Chair Jerome Powell warned the public that it would experience “some pain” as a result of the bank’s more aggressive efforts to curb inflation.

A slowing economy would limit hiring and lead to more layoffs as companies face the prospect of slower sales. The Fed is looking to cool down a scorching job market where labor shortages are rapidly pushing up wages and fueling inflation.

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

The unemployment rate, on the other hand, is expected to rise to 4.4% in 2023 and remain there until 2024. The current unemployment rate is 3.7%, just a few ticks above a half-century low.

Historically, such a sizeable rise in the unemployment rate heralded an imminent recession. And an increasing number of Wall Street DJIA,
Economists believe the US will experience a mild downturn sometime within the next year.

Senior Fed officials recognize that a recession is possible, but they still publicly suggest they can pull off a so-called soft landing. That’s a Goldilocks scenario, in which the economy slows just enough to bring down inflation without triggering a recession.

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“I’m optimistic that we’ll be able to pull through this and keep unemployment around 4.5% by the time we close,” Chicago Federal Reserve Chairman Charles Evans said earlier this month.

The outcome will depend on how much the central bank needs to raise the short-term policy rate, which banks use to set rates on credit cards, mortgages, car loans and corporate loans.

The latest Fed forecast shows the rate will rise to 4.4% by the end of this year – higher than most Wall Street forecasts. It would then peak at 4.6% in 2023 before gradually declining.

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

Fed officials agree that the higher cost of money will bring inflation back to pre-pandemic levels of 2% or less by 2025, based on their preferred PCE price index.

The consumer spending price index rose 6.3% in the 12 months to August, the highest rate since 1982.

The Fed is forecasting a slowdown from an estimated 5.4% in late 2022 to 2.8% by 2023, 2.3% by 2024 and 2% by 2025.

A better-known measure of inflation, the consumer price index, showed that prices rose 8.3% in the 12 months to August.

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