The US economy has been performing well, with key readings on the economy showing strength in labor market, consumer spending, and inflation. Despite various challenges such as labor shortages, geopolitical tensions, and aggressive interest rate hikes, the economy continues to perform well. However, this poses a dilemma for the Federal Reserve, which may need to increase interest rates to avoid inflation overheating, but at the same time risk slowing the economy down too much, resulting in job losses and higher loan rates for millions of Americans.
Federal Reserve Chairman Jerome Powell stated that the latest economic data suggest a higher level of interest rates than previously anticipated may be necessary. The Fed may increase the pace of rate hikes if data indicate that faster tightening is warranted. The looming question for the Fed is how much more tightening is needed to achieve its inflation goals without negatively impacting the economy.
Labor Market Remains Robust Despite Headlines of Layoffs
Despite recent layoffs in the tech and finance industries, the labor market remains robust. There are almost two job openings for each job seeker, and the jobless rate is at 3.4%, the lowest in 54 years. This strong labor market has resulted in the best wage growth in years, but wage growth feeds into inflation, which the Fed seeks to avoid.
The Fed is penciling in a higher jobless rate in the quarters ahead, which could mean 2 million more people out of work. Senator Elizabeth Warren has accused the Fed of trying to weaken the job market to achieve its inflation goals. However, the Fed believes that higher rates are necessary to bring down high inflation, which is hurting all working people in the country.
Upcoming Economic Reports Will Influence Fed Decision
The next two weeks will be crucial for the Fed as it deliberates on how much more tightening the economy needs. Several economic reports are due in the coming days, including the jobs report, CPI inflation report, PPI inflation, retail sales reports, housing report, and consumer sentiment report. The Fed will consider these reports ahead of its rate decision on March 22.