Federal Reserve officials confront a world of rapid inflation, slowing growth and rampant uncertainty coming from turmoil abroad. In spite of all that, they are still predicting that they might be able to cool down the U.S. economy without tipping it into a painful recession.
Economists and markets are dubious, and even central bankers acknowledge that there are risks. But here are some of the reasons they have laid out for why they might be able to pull it off:
America has a strong job market. U.S. employers are still hiring at a solid clip, and the unemployment rate is near a 50-year low. “This gives us some room to maneuver to try to take care of the inflation problem as soon as we can, while the labor market is still strong,” James Bullard, president of the Federal Reserve Bank of St. Louis, said at an event in London on Tuesday.
Job openings are plentiful. Some economists think that the strong job market could provide a cushion, specifically because so many jobs are going unfilled right now. That might mean that job openings could fall as the economy slows — but without unemployment rising as sharply as it has historically amid declining demand. Jerome H. Powell, the Fed chair, called that possibility “plausible” at his news conference last week.
Inflation expectations are stable. Consumers’ longer-term inflation expectations have moderated recently. That’s good news, because when consumers and businesses anticipate fast inflation, they can act in ways that make it more likely, such as asking for rapid pay increases or instituting regular price changes. The continued stability gives officials hope that price increases will not be as difficult to stamp out as they were in the 1980s, for instance.
Still, the risks are real. Several Fed officials have pointed to the turmoil abroad — the war in Ukraine, lockdowns in China and uncertainty in Britain — as a threat that could draw the United States into recession. It is also hard to guess how today’s rapid rate increases will play out over time, because their full effect takes a while to show up. And supply chains, while improving, could always become tangled again.
The Fed’s approach offers “a path for employment stabilizing at something that still is not a recession,” Charles Evans, the president of the Federal Reserve Bank of Chicago, said on Tuesday during an interview on CNBC Europe. “But there could be shocks.”