The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
The Federal Reserve (Fed) slowed the pace of rate hikes for the second straight time at the recent FOMC meeting that ended on February 1. The Fed funds rate was increased by 0.25% to a range of 4.5% to 4.75%, the highest level since 2007. Fed Chair Powell stated at the post-FOMC meeting that we may see “a couple more” rate hikes and that rates will stay elevated. Chair Powell remains concerned with the imbalance between labor supply and demand, with more than five million more job openings than unemployed job seekers, though wage pressures are easing despite this imbalance. Chair Powell also noted that disinflationary forces are emerging, but the level of inflation is still high.
Recent data on the economy is trending in a way that should help the Fed become less hawkish. Overall, the pace of inflation is slowing from very high levels, yet the labor market hasn’t suffered despite the surge in interest rates. In January, labor market growth accelerated, the unemployment rate fell to the lowest level since 1969 (3.4%), and jobless claims trended lower. In spite of these forces, the pace of wage growth eased. Average hourly earnings slowed to 4.4% year-over-year, the weakest pace of wage growth since August 2021. Overall, inflation continues to ease, but the descent is slow. Headline CPI slowed narrowly to 6.4% year-over-year in January (from 6.5%) and core CPI edged lower to 5.6% year-over-year (from 5.7%).
The Fed-O-Meter dial will remain slightly left of center. The Fed is likely to hike rates by an additional 0.25% in each of the next two to three meetings, before pausing to monitor the cumulative effects of rate hikes on both the economy and inflation.
