Fed predicts big slowdown in economy and rising unemployment as it battles inflation

In a major speech last month, Fed Chairman Jerome Powell warned the public it would experience “some pain” as a result of the bank’s more aggressive effort effort to roll back inflation.

A slowing economy would curb hiring and induce more layoffs as businesses faced the prospect of slower sales. The Fed wants to cool off a scorching labor market in which worker shortages are rapidly driving up wages and adding to inflation.

In updated forecasts, the Fed predicts the economy will grow at a meager 0.2% annual pace this year and a lackluster 1.2% next year — well below the outsized 5.7% gain in 2021.

The unemployment rate, meanwhile, is forecast to rise to as high as 4.4% in 2023 and stay there through 2024. The current jobless rate is 3.7%, just a few ticks above a half-century low.

Historically such sizable increases in the unemployment rate foreshadow a pending recession. And a rising number of Wall Street DJIA, -1.23% economists believe the U.S. will suffer a mild downturn sometime within the next year.

“With growth set to slow further in 2023, the sharp Fed tightening this year may have already set in motion an economic downturn within the next year or so,” said senior economist Ben Ayers of Nationwide.

Powell and other Fed senior officials acknowledge a recession is possible, but they are still suggesting publicly that they can pull off a so-called soft landing. That’s a Goldilocks scenario in which the economy slows just enough to slash inflation without triggering a recession.

“I’m optimistic that we’re going to be able to navigate this and keep unemployment to about 4.5% by the time we’re done,” Chicago Federal Reserve President Charles Evans said earlier this month.

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