Federal Funds Effective Rate
Source: Federal Reserve Economic Database
However, the demand for some of the main product categories with high inflation are not interest rate sensitive. Food and medical care services saw significant price increases for the 12 months ended in October. Various factors contributed to the increase, but the low level of interest rates wasn’t one of them. The Russia-Ukraine war has had a significant impact on increasing food prices, contributing to record level global fertilizer prices and a spike in commodity prices in 2022. The war also played a significant role in energy prices, causing oil prices to jump which in turn increases transportation prices and shipping costs. Supply chain issues contributed to the price of new cars rising significantly due to the shortage of semiconductors. Between April 2021 and July 2022, new vehicle prices increased nearly 16%. Over that same period, vehicle sales declined by over 26% from 18.8 million to 13.8 million. New vehicle sales in July 2022 were lower than at any time between January 2012 and February 2020, before the impact of COVID on the economy. The problem was supply, not demand. Although the overall level of inflation should gradually decrease in 2023, there are factors not related to interest rates that affect the demand for specific products and their pricing. Hopefully the war in Ukraine can be peacefully resolved, supply chains continue to improve, and energy prices decline or least stabilize. Economic Growth Economic growth in 2023 is expected to be relatively weak as increasing interest rates slow the economy to reduce inflation. As of September, the Federal Reserve expected annual economic growth of approximately 1.2% for 2023 before accelerating in 2024. The main question will be if a recession can be avoided. Factors outside the control of the Federal Reserve, such as the war in Ukraine, energy prices, and supply chain issues, increase the uncertainty as to whether a recession can be avoided. However, if a recession does occur, the general expectation is that it will be relatively short-lived with a minor economic contraction. There are differing opinions as to whether the Federal Reserve started increasing interest rates too late, and differing opinions as to whether the Federal Reserve will increase interest rates too much. The primary objective right now for the Federal Reserve is to lower inflation, but the hope is that interest rates will not be raised too high, which would consequently contribute to the economy slipping into recession. What has been driving economic growth? To answer that question, the table below shows how changes in the four components of GDP contributed to the change in U.S. economic growth since 2020. Personal consumption accounts for approximately two-thirds of GDP, and personal consumption has been the key, consistent, driver of economic growth during the economic recovery, contributing positively to GDP growth since the third quarter of 2020. Despite the economic slowdown in the first half of the year, personal consumption contributed to GDP growth in each of the first three quarters in 2022. Increasing personal consumption contributed to economic growth for nine straight quarters, beginning with the third quarter of 2020 and continuing through the third quarter of 2022.
Central Wisconsin Report - Fall 2022
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