RESEARCH TRIANGLE PARK – Reading between the lines of the latest Federal Reserve decision to raise interest rates again on Wednesday, three Triangle economists say a pause in further hikes appears on the horizon. But only the Fed knows for sure.
WRAL TechWire reached out to Dr. Gerald Cohen of UNC Chapel Hill’s Kenan Institute, Dr. Anne York of Meredith College and Dr. Mike Walden of N.C. State for their analysis:
My base case is a mild recession because of the strength of the labor market and health of U.S. balance sheets somewhat offsetting the pain created by higher interest rates and tighter financial conditions.
I think the Fed is done, but I don’t think they are going to cut as quickly as many expect – inflation remains stubbornly high and per below the labor market remains strong – and I don’t think the current wobbles in the financial system are going to turn into a contagion (if it does the Fed will cut quickly).
Even though Job Openings have declined, these are still at very high levels relatively to history. A recessionary decline would put us back to pre-COVID highs.
It is encouraging that the Fed softened their language about future rate increases. I have been curious to see if they will continue to raise rates until we get down to the 2% inflation rate or if they will pause to see how their previous rate increases are playing out in the economy. These rate increases have come so frequently that I think the economy needs time to adjust to them and that adjustment process could lead to lower inflation.
The quarter percent rate hike was widely expected. This puts the federal funds rate in the range of 5% to 5.25%. I had long expected the rate would eventually go to between 5% and 6%, so I am not surprised.
The comments of Fed Chair [Jerome] Powell can also be interpreted that this may be the last rate hike – at least for a while. He alluded to the possibility of a slowing economy that will moderate inflation without causing significant unemployment – also called a “soft landing.”
To evaluate whether this scenario is possible, the Fed and the business community will monitor future economic data, especially regarding wages and employment. If wage growth and job gains both moderate, there will be hope that the “soft landing” can occur. But if not, I would look for another rate hike later in the summer.
The statistics are now ruling the future !!!