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Data still strong, but bank stress complicates the Fed’s mission

April 3, 2023

Current Trends

Consumers pulled back a bit after January’s surge, but the level of spending in February was still strong enough to drive solid economic growth in Q1. Similarly, job growth slowed but remained solid and the unemployment rate rose to a still-low 3.6 percent. After another month of higher-than-expected inflation readings, the economy was clearly too hot for the Fed as of February, but a re-acceleration of hikes in the fed funds rate is not expected in part due to the stress on the banking industry. Equity markets remain on edge as leading indicators – including the full inversion of the yield curve – continue to suggest an oncoming recession in 2023.

Neutral current scorecard for March 2023.Negative future scorecard for March 2023.

Future Outlook

The conditions for a moderate recession over 2023-24 continue to build despite an acceleration in economic growth to kick off the year. Job growth and consumer activity cooled in February but still remained strong, and inflation remains far above target. These are all focal points of the Fed as it aims to bring monetary policy to a sufficiently restrictive level. While the developments in the banking industry make the interest rate path forward for the Fed less clear, they also strengthen the possibility of a downturn in the second half of this year due to a marked reduction in credit availability which would choke off consumer and business activity.


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