The US economy is likely headed for a so-called Goldilocks scenario, according to the Federal Reserve's own economists. At the time of the central bank's September meeting, they predicted slower but still positive growth, roughly flat unemployment, and a drop in inflation to about 2% over the next three years, minutes released on Wednesday show.
The staff's forecast of continued economic expansion, no spike in joblessness, and the pace of price growth slowing to around the Fed's target level between 2024 and 2026 represents a real shift in sentiment from earlier this year. The latest minutes don't even mention recession, whereas the staff warned that was a distinct possibility back in February.
America's economic strength has surprised many experts. Inflation soared as high as 9.1% last summer, a 40-year high, spurring the Fed to hike interest rates from nearly zero to north of 5% in under 18 months. Higher rates can curb the pace of price increases by driving up borrowing costs and encouraging people to save instead of spend, but they can also erode demand so much that an economy sinks into recession and unemployment soars. There's also no guarantee they'll bring down inflation, which can be stubborn.
The Fed staff noted their latest forecast is even brighter than July's edition, as consumer and business spending have been more resilient to financial pressures than expected. They pointed to solid growth in the third quarter, a tight labor market with low unemployment and strong but slowing job gains, and signs of slowing inflation as reasons for their optimism.
The latest minutes may also reassure investors. Staff warned in February that the S&P 500's forward multiple was above its median historical value, and high valuations in residential and commercial real estate raised the prospect of "large declines in property prices." They didn't flag those risks in September, suggesting they were less worried about asset prices than a few months earlier.
It's worth noting the Fed economists said there's substantial uncertainty around their baseline projection, inflation risks are skewed to the upside, and if prices do take off, the resulting monetary and fiscal response could dampen economic activity. They also issued their forecast a few weeks ago, meaning it doesn't factor in recent developments such as the Israel-Hamas war or the latest swings in bond markets.
