The Federal Reserve’s recent Beige Book offers a glimpse into that world of guarded optimism across the economy. Today, inflation rates are holding closer to 3% than they are to their stated target of 2%. This trend is a sign that inflation should trend downward over the course of the year. The job market is intentionally slowing down in a measured manner. The unemployment rate is within spitting distance of the neutral rate. At the same time, growth in jobs maintains a solid pace, as Minnesota keeps adding around 30,000 to 80,000 jobs per month on average.
Recent analyses point to a real danger of rapid inflation. The surge in goods prices and the housing market are forecast to wane substantially over the course of the year. Many—including the Federal Reserve—have declared their monetary policy to be near neutral. This focused long-term strategy has made it nimble enough to respond rapidly to shifts in market demand as the labor market further cools. The argument for cutting rates in December definitely included a modestly increased risk with respect to the labor market.
Recent data indicate inflation will get nearer to the 2% target in the next few months. Economists are bullish on the economy’s prospects. If projections hold, growth will be at or above potential by 2026.
All of these signs, combined with other economic indicators, paint a mixed but positive picture. Consumption still seems reasonably strong. Businesses are reporting a tide of cautious optimism about continued growth. Still, these trends are a clear sign of a slow but improving rebalancing in the economy.
“Cautious optimism.”
As recently as January analysts were worried that the risk of an outbreak of accelerating inflation was increasing. That shouldn’t prevent policymakers from fully considering PEF as they weigh their choices. A collaborative spirit and understanding of common goals will be needed, for the Federal Reserve will not be abdicating its rate-setting responsibilities.
The labor market has really stabilized for the first time. Job creation is now directly tracking economic growth expectations, a sign of this normalization. This context helps provide a better sense of how much employment and inflation are expected to develop over the course of the year.