The American economy is proving resilient despite the Federal Reserve’s efforts to slow down growth and control inflation. This could mean good news if the Fed can gradually control inflation without causing a recession. However, if companies continue to raise prices without losing customers, it could create hot inflation, forcing the Fed to restrain growth even further. Policymakers need time to understand which scenario is more likely to occur. Investors are betting that the Fed will not increase rates at their June meeting before lifting them again in July, but even that expectation is uncertain. Interest rates are at their highest since 2007. Even parts of the economy that typically slow down when interest rates raise are showing surprising results. Economic indicators like GDP have slowed, but the overall economy is still holding up. Slower car buying has affected the auto market, but the housing market had a turnaround with higher home prices. The job market has mixed signals, as job openings edged up in April and wages climb less swiftly for lower-income workers. Despite this, the labor market continues to hire strong. Inflation remains the biggest factor in shaping the Fed’s plans. Inflation as measured by Personal Consumption Expenditures is forecast to retreat to 3.3 percent by the end of 2021 from the 4.4 percent reported in April. The May Consumer Price Index will give updated inflation readings for the Fed’s meeting, and economists expect substantial cooling, which could reassure officials in pausing rates. However, if those forecasts fail, it could create an even more heated debate for the Fed.
