Fed pauses interest rate hikes as inflation continues to collapse to 4 percent and global economy heads into recession

The Federal Reserve has halted increasing its target interest rate, the Federal Funds Rate, at 5 percent to 5.25 percent, as consumer inflation reported by the Bureau of Labor Statistics continues to slow down, now down to an elevated 4 percent the past twelve months. Last month it was 4.9 percent.

The biggest offsets on inflation the past year, which peaked at 9.1 percent annualized in June 2022, have come from energy, which was spiking to the moon in 2022, but is now down 11.7 percent off its 2022 highs. Gasoline is down 19.7 percent compared to last year, and fuel oil is down 37 percent.

Still, there are other areas of concern, particularly with food inflation, with prices up 6.7 percent the past year and still climbing.

Towards that end, the Fed is not taking further rate hikes off the table, instead saying in its June 14 statement it is still "determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time…" Meaning, there could still be another spike.

Usually, in the economic cycle, when the Fed reaches a high-water mark for interest rates, it will tend to hold rates at that level until such time that prices have fully corrected, often coinciding with a recession as demand cools off. Many of those signs are already present.

Globally, Germany's economy is already shrinking, down 0.5 percent and 0.3 percent the past two quarters, which is taking much of the Eurozone with it, after the economy overheated from too much inflation and energy scarcity following Russia's invasion of Ukraine in Feb. 2022 that worsened an already bad supply chain situation, particularly of global oil and natural gas markets.

New Zealand just entered a recession as well, down 0.1 percent the past quarter.

And in China, youth unemployment just hit a record high of 20.8 percent in May, while overall unemployment was at 5.2 percent as the economy there slows down.

As for the U.S., unemployment is still near record lows, currently at 3.7 percent in May, but that's up from 3.5 percent in April. And the Fed is projecting it to keep rise steadily to 4.1 percent this year and up to 4.5 percent in 2024.

One offset to what might otherwise be a deeper recession are job openings measured by the Bureau of Labor Statistics, which increased by 358,000 to 10.1 million in April. That's still more than 15.9 percent below the 12 million peak in March 2022. Job openings in the past three recessions have tended to dip significantly.

But the number of job openings increasing over the past decade has coincided with the number of Americans retiring. Americans not in the labor force 65 years old and older has increased 3.27 million since Feb. 2020, from 28.3 million to 31.4 million today. In Jan. 2009 it was just 20.1 million. That's the Baby Boomer retirement wave.

Still, a rise to 4.5 percent unemployment over the next year or so is an implied 1.3 million jobs losses between then and now. Not the worst upheaval in labor markets in history — the 2008 and 2009 recession and 2020 Covid recession were much, much worse — but it is still quite significant.

Which, is usually what happens after the economy overheats from inflation following a period of growth. In the current cycle, more than $6 trillion was printed, borrowed and spent into existence to offset global Covid economic lockdowns and production halts. It was too much money, chasing too few goods.

And now comes the price. Looking forward, if the unemployment projections play out as anticipated or are worse, there will come a point when the Federal Reserve will begin cutting interest rates to ease lending conditions, and may begin to accumulate more treasuries and mortgage-backed securities again — so-called quantitative easing — if prices look like they might start contracting outright in deflation. As usual, stay tuned.

Robert Romano is the Vice President of Public Policy a