Number of Unemployed Persons per Job Opening
Source: U.S. Bureau of Labor Statistics
The strong labor market and rising wages are a key concern expressed by the Federal Reserve, as wage growth can contribute to strong consumer demand, which in turn can contribute to inflation. Ideally, wage growth occurs without inflation; however, recent wage growth has been outpaced by inflation. A primary focus in 2023 by the Federal Reserve will be to reduce wage growth by balancing the number of unemployed persons with job openings. Wage growth in 2023 should be tempered by growing unemployment and a cooling labor market that result from weak economic growth. Summary In 2022 inflation was a global problem, ranging from 7-10% in the Euro area, United Kingdom, Canada, and the United States. Inflation was driven by global factors, including the effects of the Russia-Ukraine war and its impact on food and energy prices. Central banks around the world, including the United States Federal Reserve, began increasing interest rates to raise borrowing costs and consequently lower consumer and business demand. Over the years, a 2% inflation target has become an international standard across central banks around the globe, including the Federal Reserve. Global interest rates will likely increase until decreasing inflation makes the 2% target seem achievable. As of September, the expectation by the Federal Reserve is that core inflation will fall to approximately 3% in 2023. However, like most forecasts, it is subject to change and error, especially since there are global factors outside the control of the Federal Reserve that will impact inflation. As a result of rising interest rates, 2023 is projected to be a relatively weak year at best for economic growth, with the Federal Reserve predicting growth of only around 1%. There remain concerns over a possible recession, partially because of concerns that the Federal Reserve began raising interest lates too late or may raise them too much. However, if a recession does occur, the general expectation is that it will be relatively short-lived with a minor economic contraction. The number one issue for the Federal Reserve is to lower inflation and increasing interest rates is the primary way that the Federal Reserve can battle inflation. There is generally an inverse relationship between interest rates and economic growth. Interest rates will be increased until the long-range inflationary target of 2% once again seems achievable. The increased interest rates should lower consumer and business spending, resulting in weak economic growth. The Federal Reserve not only wants to lower inflation, but also inflationary expectations. The federal funds rate is expected to be around 5% in early 2023, with subsequent increases or decreases subject to changes in the rate of inflation.
Central Wisconsin Report - Fall 2022
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