Growth is running hot this summer, putting the Federal Reserve in a challenging position. Here’s what it means for the economy and, potentially, your nest egg.
While it's encouraging that inflation has cooled — from 9.1% last summer to 3.2% last month, Federal Reserve Chair Jerome Powell said on Friday inflation is still too high, and he warned that restoring price stability will likely require an extended period of elevated interest rates.
As recently as June, the median Fed official projected 1% GDP growth for 2023, comfortably below the 1.8% they viewed as the economy's long-term growth rate. This would amount to a period of what the Feds call "below-trend" growth, which in turn, should enable economy-wide supply and demand to come back into balance. But actual growth predictions are coming in much stronger.
In this blog, we'll delve into the significance of the Federal Reserve's long-term GDP outlook and implications for the future. Here’s what you need to know.
Gross Domestic Product, or GDP, measures a country's overall economic health and performance. It represents the total value of goods and services produced within a nation's borders during a specific time. GDP growth coincides with job creation, consumer spending, and investment trends.
The Federal Reserve is the central banking system of the United States. While its main role is to ensure stable prices and maximum employment, it also provides economic forecasts, including long-term GDP projections. The Fed's economic outlook is based on data analysis, economic models, and judgment. State and local governments rely on GDP numbers, too.
GDP outlooks are based on macroeconomic models considering population growth, productivity gains, technological advancements, and global economic trends. The Fed attempts to anticipate economic growth trajectory over extended periods by analyzing historical data and current conditions. Let's look at how the current economic climate is fairing.
Still grappling with persistently high inflation, the Federal Reserve faces an entirely new — and in some ways conflicting — challenge as it meets to consider interest rates: How to restore calm to a nervous banking system.
On one hand, to combat high inflation, they'd usually increase their main interest rate, which they've done eight times in the last year. On the other hand, to keep the financial markets calm, they might want to keep the rate as it is for the time being.
Over the past three years, spanning the aftermath of a world-altering pandemic, the United States saw an annual expansion of 2.5% between the 2016 Federal Reserve meeting and the start of the COVID-19 Pandemic. This upward momentum has sustained, averaging 3% under the leadership of President Joe Biden. However, in this dynamic economic landscape, the journey of GDP growth is constantly changing.
When the Fed raises its key rate, it typically leads to higher rates on mortgages, auto loans, credit cards, and many business loans. Typically, consumer and business spending slow in response.
Since March 2022, the Federal Reserve has implemented a series of interest rate hikes totaling 5.25 percentage points. This move was made to help with surging inflation, yet its impact on the economy has not been as pronounced as initially expected. Despite this, the U.S. economy registered a 2.4% annual growth rate in the second quarter and shows signs of maintaining its momentum into the third quarter.
While economists predict an eventual deceleration, the duration of this growth might cause the Fed to continue its efforts to guide the economy. Over the past decade, the median projections for U.S. economic growth, as assessed by critical figures within the Fed, have undergone a notable shift. Once hovering around 2.5%, these projections have gradually declined to 1.8% as of the most recent update.
In the upcoming six to twelve months, the possibility of a recession becomes a pertinent consideration—a function within the purview of the Federal Reserve. Following this phase, the focus will likely shift toward a gradual growth trajectory.
The impact of the Fed's long-term GDP outlook can affect your finances. Whether you are an investor or approaching retirement (or both!), consider the following tips to help curb inflation and other anticipated outcomes.
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The Fed is stuck between a rock and a hard place as high inflation and a banking meltdown demand opposite responses. Anyone anticipating a rapid cut in interest rates would have been disappointed by Powell's remarks last week, pointing to higher-than-expected GDP growth and robust consumer spending as signs that further rate hikes may be needed.
Ironically, though, that slowdown in growth could help the Fed, which has had only limited success in trying to cool the economy through its rate hikes.
As we move forward, understanding the factors that shape these forecasts will be instrumental in preparing for the financial challenges and opportunities.
When it comes to protecting your wealth, NJM Wealth Preservation Strategies stands out as a trusted partner for investors and retirees. With a focus on personalized solutions and a deep understanding of the financial landscape, Fiduciary Nic J. McLeod and his team can help you maximize retirement income, protect your wealth and prepare you for whatever the Feds, and economy may bring.