A year ago, most economists had envisioned a much darker outlook. As the Fed raised interest rates at the fastest pace in four decades to fight high inflation, most economists warned of a recession, possibly a painful one, with waves of layoffs and rising unemployment. Even the Fed’s own economists had projected that the economy would sink into a recession in 2023.
The unexpectedly rosy picture — one that’s sure to be subject to heated debate in the 2024 presidential race — may have left some Fed officials saddled by uncertainty. With their frameworks for assessing the economy upended by the pandemic and its aftermath, it’s hard to know whether the economy’s healthy conditions can endure.
The Fed’s aggressive streak of 11 rate hikes, beginning in March 2022, was intended to tame inflation, which peaked in June 2022 — according to the central bank’s preferred gauge — at 7.1%. But data released Friday showed that over the past six months, inflation has fallen all the way back to the Fed’s 2% annual target level. In the past three months, year-over-over inflation that excludes volatile food and energy costs has dropped to just 1.5%.
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