Federal Reserve on cusp of what some thought impossible: Defeating inflation without steep recession

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The Federal Reserve appears to have achieved a remarkable feat: taming inflation without triggering a severe recession, a prospect that had worried many economists. This recent achievement comes after experiencing the most significant inflationary pressures since 1981.

Inflation, which had surged to 9.1% in June of the previous year, has been steadily declining. Economists at UBS estimate that the upcoming report on the Fed’s preferred inflation gauge for November will likely reveal that annual inflation dipped just below the Fed’s 2% target over the past six months.

Several factors have contributed to this decline. The prices of goods, including used cars, furniture, and appliances, have dropped for six consecutive months. Improved global supply chains have helped keep goods prices stable compared to the previous year. Housing and rental costs, which had been a significant driver of inflation, are now growing at a slower pace. Wage growth has also cooled down, although it remains above the inflation rate. This milder wage growth has reduced the pressure on businesses like restaurants and hotels to raise prices to cover labor costs.

Federal Reserve Chair Jerome Powell expressed optimism about the progress during a recent news conference. He mentioned, “I think it’s really good to see the progress that we’re making.” However, he emphasized that no one is declaring victory, and the central bank wants to see further evidence of sustained inflation decline before feeling confident about achieving its 2% target.

While caution remains, many economists are now inclined to believe that inflation is almost back under control after affecting millions of American households for more than two years. Tim Duy, chief economist at SGH Macroeconomics, remarked, “It appears that inflation has returned to 2%. The Fed looks like it has won that battle.”

Moreover, inflation is moderating in other parts of the world as well. The Bank of England and the European Central Bank have kept their benchmark interest rates unchanged, reflecting a global trend of cooling inflation.

This shift in the inflation landscape has prompted discussions within the Federal Reserve about potential rate cuts. The central bank, which had embarked on a rate-hiking campaign earlier, is now projecting three rate cuts for the next year, marking a significant departure from its previous stance.

The recent developments have had a positive impact on financial markets, with stock market indexes surging. There is a growing anticipation that the first rate cut could occur as early as March, with expectations of a total of six cuts in 2024.

However, some Fed officials are urging caution, emphasizing that it’s premature to discuss rate cuts in March. Nevertheless, the overall consensus is that inflation is on a sustainable path towards the 2% target.

In conclusion, the Federal Reserve’s efforts to combat inflation seem to be bearing fruit without causing a severe economic downturn. Rapid rate hikes, coupled with other factors like supply chain improvements and moderated wage growth, have contributed to this success. While challenges remain, including potential housing-related inflation, the central bank’s projections and economists’ confidence suggest that inflation is gradually coming under control. This outcome provides hope for achieving an “immaculate disinflation” scenario, where inflation is defeated without triggering a recession.

Frequently Asked Questions (FAQs) about inflation control

More about inflation control

• Federal Reserve: Official website of the Federal Reserve System.
• Inflation Trends: Bureau of Labor Statistics data on inflation trends in the United States.
• Interest Rate Policy: Information on the Federal Reserve’s interest rate policy.
• Economic Projections: Federal Reserve’s economic projections.
• Global Inflation Trends: Information on global inflation trends and central bank actions.
• Retail Sales: Retail sales data from the U.S. Census Bureau.
• Immaculate Disinflation: Explanation of the concept of “immaculate disinflation.”