In testimony to Congress this week, Federal Reserve Chairman Jerome Powell indicated strongly that interest rates are heading higher than previously believed. Because inflation data for recent months have been uncomfortably high and because the economy continues to show signs of strong growth, the…
data for recent months have been uncomfortably high and because the economy continues to show signs of strong growth, the Federal Reserve believes that the terminal rate for interest rates, that is where the Federal Reserve will stop raising rates, might be higher than the current projected stopping point of 5.25%-5.50%.
As interest rates increase, the risk of a recession rises. Powell acknowledged that higher rates would bring higher unemployment. He explained that near-term economic pain is necessary for long-term prosperity. Inflation is sticky and elevated because the labor market remains extremely tight. The unemployment rate was 3.4% in January, its lowest level since 1969. Job gains remained very strong in January. As of the end of December 2022, there were 1.9 job openings for each unemployed person, close to the all-time peak recorded in early 2022. At the beginning of this year, the U.S. economy had 170 million jobs but only 166 million available workers. That is the definition of a tight labor market.
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