Taming Inflation Is Only Half the Fed’s Battle
The same industries that are slowing now could snap back abruptly if the central bank eases up too soon, triggering a whole new round of overheating and tightening.
As inflation cools, demand will rebound.
Photographer: George Frey/Bloomberg
As we approach the end of 2022, investors are hoping that inflation will fall in 2023 and lead the Federal Reserve to pause and perhaps reverse some of its interest-rate hikes. The looser financial conditions would then allow for accelerating economic growth and a better year for financial markets.
Well, not so fast. The parts of the economy that have been slowing down in recent quarters are the same ones that are poised to rebound sharply in such a scenario. That creates a challenge for the Fed that's likely to persist even after supply-chain problems and pandemic-related inflation abate.
As last week's third quarter gross domestic product showed, there have been four categories of economic activity that have been significant drags on growth this year. Two of those are the result of consumer behaviors normalizing after the pandemic, and two were caused at least in part by the Fed's rate increases.