Trying to navigate the economy out of historically high inflation without crashing into recession is proving trickier than ever for the Federal Reserve. Despite eight interest rate hikes since last March, inflation remains stubbornly high early in 2023. Last week, the stock market had its worst week of the year, as talk of more Fed rate hikes triggered new recession fears. Most economists are now predicting at least three more interest rate hikes ahead.
Hank Lewis, economics professor at Lone Star College, says the Fed is making some progress on inflation, albeit very slowly. "Inflation is better under control than it was a year ago," he tells KTRH. "We have a current annualized rate of about five percent, which is down from about seven percent one year ago."
Still, major headwinds persist in getting the inflation rate down to the Fed's target of two percent. "We still have energy disruption issues surrounding the war in Ukraine, and then there's the tight labor market," says Lewis. "Until there is some easing on those two factors, the Fed will not feel like it has fully completed the job."
In the meantime, the Fed's continued aggressive stance toward inflation will likely mean more nervous investors and more volatility in the markets. "Some people are now worried that the effects of last year's interest rate hikes are lagging, and once those effects hit, we could be heading to a stronger contraction in the economy than the Fed would like to have," says Lewis.
A recent survey of top U.S. economists found a majority believe we are likely headed for a recession this year. But nobody really knows, and that uncertainty is what the markets can't stand. "There is so much uncertainty about things that are beyond the control of the government, of the Federal Reserve, or of people in general," says Lewis. "That uncertainty alone leads to more economic downturn."