Page 12 - ISQ October 2022

INVESTMENT STRATEGY QUARTERLY

FED

Economic Outlook:

The Fed’s Conundrum

Eugenio J. Alemán, PhD, Chief Economist, Raymond James

The Federal Reserve (Fed) and the financial markets are
going to have a tough time during the last quarter of the year An increase in the labour force participation
with the economy showing no signs of slowing down. The rate would be a best-case scenario for both the
strength of the employment recovery after the COVID-19 Fed and the markets, as the rate of unemploy-
pandemic ended has continued unabated and has been the ment would increase, reducing pressures from
higher wages on inflation which, today, is at the
reason why we still contend that the US economy did not top of Fed officials’ concerns.
experience a recession during the first half of 2022, even
though GDP numbers showed two consecutive negative
prints. And this strength continued during the first two TO RAISE OR NOT TO RAISE
months of the third quarter of the year with employment However, there isn’t a unique path to this new scenario. Certainly,
growing by 526,000 in July and by another 315,000 in August. the preferred path for the Fed is one it has some relative control
over. That is, to continue to increase interest rates until the
In fact, some economists are calling the current environment, or economy falls into a recession. The second path, however, is to
the path that the Fed should follow in the coming quarters, a have patience and allow the current increase in rates, plus the
‘growth recession.’ That is, an economy growing very slowly but ones baked into market expectations for the rest of the year, to do
shedding jobs along the way, so wage pressures start to recede their job. However, for this strategy to be successful, it will need
and help push inflation back to the 2% for the personal con- help from the labour force participation rate, or something like
sumption expenditures deflator the Fed has established as its what we saw in the August jobs report.
inflation target.

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