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Where’s the economy headed? To quote the Fed chief: ‘Hard to say’

The economy continues to be remarkably confusing as policymakers keep at their fight against inflation

A hiring sign hangs in the window of a Chipotle in New York on Tuesday. The labor market remains hot after months of interest rate hikes by the Federal Reserve. It's a confusing economy for policymakers and consumers alike. (Seth Wenig/AP)

If the economy looks confusing to you, rest assured — it looks that way to the people in charge of stabilizing it, too.

When the Federal Reserve raised interest rates yet again this week, the central bank’s case for how it would tackle inflation without causing a recession boiled down to: It’s unclear. What are the odds of avoiding a downturn? “Hard to say,” conceded Chair Jerome H. Powell. How high will interest rates go? “Very uncertain.” In an hour-long news conference on Wednesday, Powell said “don’t know” four times.

Fed chief sees narrower path to avoid a recession in inflation fight

Powell is hardly the only one without answers, and his remarks reflect how confounding the economy remains for those inside and outside the Fed. The markets, policymakers, households and businesses have been operating without a playbook for two-and-a-half years. And now, the latest wave of uncertainty is swelling, with few guarantees about what’s still to come, or how painful the path ahead will be.

“Economists, generally, are being humbled by the experience of the past year,” said Karen Dynan, a former chief economist at the Treasury Department who is now at Harvard University. “And I think the Fed is also realizing that they don’t have as good a grasp on what’s likely to happen as they might have thought earlier.”

There are plenty of reasons. Inflation is still near 40-year highs, with many parts of the economy not yet responding to the Fed’s aggressive moves. This week, the Fed hiked rates for the sixth time since March, announcing its fourth consecutive increase of 0.75 percentage points — when it hadn’t previously raised rates that steeply even once since 1994. That brought the Fed’s policy rate to between 3.75 and 4 percent, with the growing expectation that rates could eclipse 5 percent early next year.

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So far, those moves have triggered a massive slowdown in the housing market, as aspiring buyers shy away from soaring mortgage rates. But officials are seeing little progress elsewhere. That could be because rate hikes operate with a lag that is hard to parse. Or it could be because various drivers of inflation — from sluggish supply chains to Russia’s war in Ukraine — can’t be solved by Fed action alone.

Then there’s the labor market, which has remained remarkably resilient through the Fed’s scramble to slow the economy. But there, too, the picture is getting hazier. On one hand, the job market appears to be softening: Employers added 261,000 jobs in October, edging down again after growing like gangbusters in the first half of the year. But employers are still desperate to hire: The number of job openings actually rose in September compared to the month before, to 10.7 million.

U.S. added 261,000 jobs in October as labor market continues to soften

Meanwhile, wage growth accelerated slightly in October, with average hourly earnings rising by 0.4 percent, to $32.58. But worker productivity is dropping, falling in the first half of 2022 by the sharpest rate on record going back 75 years.

Add in confusion from abroad. The world’s major central banks are all hiking rates simultaneously as they fight to get inflation under control. But those moves amplify one another and add instability to the global financial system. And Europe is staring down a severe energy crisis this winter, following Russia’s decision to halt natural gas deliveries via the Nord Stream 1 pipeline. And the U.S.-China relationship is straining under economic and national security pressures.

Ultimately, questions swirl around how the Fed will cut through the fog. Officials have been resolute that they will get inflation under control, even if that means causing a downturn. They insist that doing too little to stifle inflation now will cause more problems down the line.

U.S. economy grows in third quarter, reversing a six-month slump

During his news conference Wednesday, Powell opened the door to slowing the pace of rate increases in the coming months, but said officials were a long way from pausing. As a result, the chances of avoiding a recession are slimming.

“Has it narrowed? Yes. Is it still possible? Yes,” Powell said. “I think we’ve always said it was going to be difficult, but I think to the extent rates have to go higher and stay higher for longer, it becomes harder to see the path.”

His colleagues seem to agree. The last time Fed officials released economic projections in September, every participant of the central bank’s policymaking committee said the outlook for four key indicators — economic growth, the unemployment rate and two measures of inflation — were more uncertain than the average over the past 20 years. The only other meeting when that has happened was in June 2020, the first time officials submitted projections after the pandemic-driven shutdowns began that spring, according to David Wilcox. Wilcox is a senior fellow at the Peterson Institute for International Economics and director of U.S. economic research at Bloomberg Economics.

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Over the coming weeks, Fed officials will start to weigh in on what they think the central bank should do next. They will release new projections at their policy meeting next month. (They weren’t scheduled to release any in November.)

“There is no one single indicator that will be sufficient by itself to guide policy,” Boston Fed President Susan Collins said in a Friday speech. “Decisions, even more than usual, will require a careful, holistic assessment of the range of information available. Our task is further complicated by some unusual challenges of extracting the signal from what can be very noisy data.”

Grappling with the unknown is part of the job for a central banker. Wilcox pointed to a 2003 Jackson Hole, Wyo., speech by Fed Chair Alan Greenspan that began: “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.”

“[Powell] can be clear about the destination,” Wilcox said. “He can’t be clear — and it’s important that he not be clear — about the pathway that leads to the destination.”

Dynan, the Harvard economist, put it this way: “It’s very odd to be reassured by someone saying, ‘We don’t fully understand what’s going on.' But the point there is that that’s better than feeling like somebody understands — or thinks they understand — more than we really can. That would be a worse situation.”

That doesn’t always make the economy feel any less bewildering for most people, though.

Outside Fort Worth, Victor Garcia is managing that uncertainty from his storefronts selling Mexican ice cream and paletas. For the first time since the pandemic, Garcia has finally reached a full staff of almost two-dozen employees. Now he’s looking to expand his wholesale business to find new customers, such as getting a local restaurant to start selling a freezer full of Garcia’s favorite strawberry paletas.

Even if the economy tips into recession, Garcia says that consumers will still crave the little things that brighten their day. The question for him is how to make his company, Sol Dias, the place people seek out.

“It’s up to us to listen to what the market is doing, and shift in that direction,” Garcia said. “At this point, there’s no normal. You just go for what the customer is asking for.”

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