WASHINGTON — A year ago, Chair Jerome Powell delivered a stark warning: To fight persistently high inflation, the Federal Reserve would continue to sharply raise interest rates, bringing “some pain” in the form of job losses and weaker economic growth, according to an Associated Press report.
Since Powell spoke at last summer’s annual conference of central bankers in Jackson Hole, Wyoming, the Fed has followed through, raising its benchmark rate to 5.4%, its highest level in 22 years. Substantially higher loan rates have followed, making it harder for Americans to afford a home or a car or for businesses to finance expansions.
Yet so far, broadly speaking, not much pain has arrived.
Instead, the economy has powered ahead. Hiring has remained healthy, confounding legions of economists who had forecast that the spike in rates would cause widespread layoffs and a recession. The unemployment rate is near a half-century low. Consumer spending keeps growing at a healthy rate.
As Powell and other central bankers return to Jackson Hole this week, the economy’s resilience has thrust a new set of questions at the Fed: Is its key rate high enough to slow growth and cool inflation? And will it need to keep its rate elevated for longer than expected to slow growth and tame inflation?
“The economy seems to be humming along well, inflation is coming down,” said David Beckworth, a longtime Fed-watcher who is a senior fellow at the Mercatus Center at George Mason University, a think tank. “It seems more and more likely that we’ll have higher growth and higher interest rates going forward.”
One after another, economists have postponed or reversed their earlier forecasts for a U.S. recession. Optimism that the Fed will pull off a difficult “soft landing” — in which it would manage to reduce inflation to its 2% target without causing a steep recession — has risen. Nearly seven in 10 economists polled by the National Association for Business Economics say they’re at least somewhat confident that the Fed will achieve a soft landing, according to the NABE’s latest survey.