The U.S. Federal Reserve spent the year raising rates before taking an early summer hiatus in an effort to tame and eye the economy. The FOMC then issued another hike of 25 basis points in July. The goal is to restore price stability while causing as little pain as possible in the labor market.
Analysis from the International Monetary Fund suggests that maintaining elevated interest rates throughout the year will help tame inflation. Although these higher rates are expected to temporarily increase unemployment, they are seen as necessary for achieving stable inflation and sustainable economic growth, ultimately creating more jobs in the future.
This is in the face of historical demand for new hires in the U.S. The market has eclipsed the supply of available workers, leading to the lowest unemployment rate in over 50 years and contributing to higher inflation.
These conditions have increased workers’ bargaining power, leading to higher wages and subsequent price increases as firms raise prices to offset rising labor costs. Labor-intensive industries such as hospitality and food service have been particularly impacted by the inflationary market.
When prices began to rise in 2021 impacted by pandemic-related monetary disruptions it was felt heavily throughout the economy, particularly in the auto industry and housing sector. The annual growth rate of prices had been above 9 percent and remains a point and a half above the 2 percent target.
Achieving the Fed’s 2 percent inflation target is crucial for stable job growth and sustainable income growth in the medium to long term. The temporary increase in unemployment resulting from higher interest rates is seen as a necessary measure to offset inflation costs and pave the way for a stable and robust economy.
Notes on the Housing Market
The general housing market has experienced a 30 percent decline in the last year. Analysts believe the sector is will face continued pressure through the year. This dip in the general market is seen as an opportunity for more affordable and attainable homes, including manufactured housing.
Home prices have started to come down in some high-demand markets, notably out West in places like Las Vegas, and Tucson, Ariz., offering some optimism for a creeping correction. Fortunately, the current housing correction differs from the crisis of 2008 as household leverage sits at a 20-year low. Going forward, the main concern is less related to credit risks and more focused on the lack of housing mobility and high barriers to entry for prospective buyers.
While consumer spending showed a strong start in the year, concerns arise due to elevated prices, high interest rates, and deteriorating credit conditions, suggesting a slowdown in spending in the upcoming months.
Real consumer spending growth is projected to average around 4 percent annually into the second quarter. Personal income will remain significantly lower than pre-COVID-19 levels, raising concerns about the labor market and the sustainability of consumer spending. The quit rate could increase. Although consumers have managed to cope with elevated prices through savings and increased credit utilization, these factors cannot replace organic income growth.
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