Highlights
“The Federal Reserve’s aggressive counter-inflationary policies, particularly interest rate raises, are expected to have a delayed restrictive effect on the economy.”
Summary
In the 4th quarter of 2022, the ongoing battle between inflation and interest rates threatened, but did not thwart, economic growth. Gains in real GDP and a still-strong job market, with unemployment still equal to its low pre-pandemic rate, stood out as bright spots in the economic landscape. Inflation finally showed signs of dulling its roar, with energy prices down and the index for the remaining categories decelerating. However, the Federal Reserve, still awaiting consistent evidence of inflation control, indicated that its target interest rate has not yet peaked. The elevated interest rates have deflated a buoyant housing market and wreaked havoc in the bond market. Despite a slight rebound in the 4th quarter, stocks also suffered the tolls of high interest rates in 2022.
While GDP has continued to expand, many economists believe the days of growth to be numbered, pointing to a drop in residential fixed investment and slowing economic activity as the 4th quarter went on. The Federal Reserve’s aggressive counter-inflationary policies, particularly interest rate raises, are expected to have a delayed restrictive effect on the economy. FOMC members lowered projections of economic growth to 0.7% in 2023.
Both the stock and bond markets suffered the effects of the inflation-interest rate battle in 2022. While stocks posted their worst-performing year since the Great Recession, high interest rates drove bond yields up and dragged prices down. The U.S. Treasury yield curve inversion—widely regarded as a harbinger of recession—became more pronounced as the second half of 2022 progressed.
Recorded COVID-19 cases rose during the 4th quarter of 2022. With widely available at-home tests and relaxed testing policies in public and private spaces across the U.S., official COVID case rates likely no longer give an accurate picture of the virus’s reach.
Vaccines have been established as a reliable way to limit serious illness and death from COVID-19. During the 4th quarter, 39.7 million vaccine doses were administered, most of them boosters. 4.1 million people received their first doses of vaccine and 3.1 million became fully vaccinated. Although it is still too early to tell when COVID-19 will reach an endemic phase in the U.S., a combination of vaccination and prior infection has allowed many aspects of life and commerce to return closer to normal.
A multifactor indicator of economic strength, the Philadelphia Fed’s coincident index of economic activity in the U.S. rose 0.3% in December 2022 and 0.8% during the 4th quarter. For the quarter, coincident indexes increased in 28 states, decreased in 13 states, and were unchanged in 9 states. Coincident indexes reflect unemployment, payroll employment, manufacturing hours, and wages and salaries.