On Wednesday, the Fed Chair Jerome Powell sketched out a positive scenario in which inflation gradually comes down throughout 2023, the economy manages to avoid a recession, and the unemployment rate doesn’t rise drastically.
Still, Powell also sketched out a positive scenario in which inflation gradually comes down throughout 2023, the economy manages to avoid a recession, and the unemployment rate doesn’t rise drastically. Referring to prior periods when the Fed raised interest rates sharply, he conceded, “If you look at the history, it’s not a likely outcome.” However, he added, “But I would just say this is a different set of circumstances.
The Fed’s fear is that this large gap between job openings and job seekers is putting upward pressure on wages, which is causing inflation to spread from goods to the service sector . In Powell’s best-case scenario, which he laid out clearly, a slowing economy will cause the imbalance in the labor market to resolve, mainly through a decline in job vacancies rather than an increase in layoffs and unemployment.
If Powell does achieve his goal, it would obviously be advantageous to Joe Biden and the Democrats, who would much prefer to go into the 2024 election year with the economy growing healthily and the inflation spike in the rearview mirror. Judging by the bounce in the stock market, many investors think that such an outcome is possible.
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