Examining the Impact of the Fed’s Hawkish Stance and Key Indicators on the US Economy


Key Points
As we approach mid-2023, the US economy has been the subject of much speculation among economists and investment banks. The prevailing assessment, based on the Federal Reserve’s (Fed) aggressive hawkish monetary policy, was that the US economy would enter a recession phase.


When Will the Fed Halt Interest Rate Hikes?

The key concern for many is when the Fed will stop raising interest rates and pause its hawkish monetary policy. The primary factors influencing Fed decisions are employment data and inflation. While inflationary pressures are challenging to quickly alleviate, employment data can deteriorate rapidly, requiring the Fed to respond on the spot when making decisions.


The Producer Price Index (PPI), a leading statistical indicator of price volatility, surged with an annual growth rate exceeding 11% in the first half of 2022. However, by Q1 2023, it had decreased to 2.7%. The core PPI, which excludes food and energy, also declined to 3.4%. Moreover, prices of various raw materials, metals, crude oil, and natural gas have remained relatively stable over the past year, indicating a high probability of continued cooling of the PPI in the short term. Additionally, the sluggish economic growth in the United States, Europe, and China, coupled with subdued demand, makes it unlikely for prices of raw materials and industrial production costs to rise significantly in the near term. It is important to note that the Producer Price Index reflects market prices of goods derived from it, and the real-time consumer price index data from the US government typically requires over a quarter for compilation. This means that even if the Producer Price Index stops declining, US inflation is likely to remain relatively subdued for some time.

Cooling Trend in US Inflation

As of March 2023, the year-on-year inflation rate in the United States has dropped to 5.0%, with the core inflation rate at 5.6%. However, the year-on-year inflation rate for core goods is only 1.5%. While core services, particularly the Shelter category, which holds the highest weightage of 34.4%, have yet to show a significant decline in statistical terms, real estate market statistics from sources such as Apartment List and Redfin indicate a gradual decrease in rental prices after a peak and subsequent stabilization. This suggests that over time, core inflation in the United States will gradually ease. However, it is likely that it will take until the fourth quarter of 2023 to reach below 3%.


Nevertheless, overall inflation is highly probable to continue cooling in the second quarter. If US inflation has already cooled to 5.0%, this would imply that the US dollar’s interest rates have reached the same level. With real interest rates no longer in negative territory, the Fed may see no immediate need to continue raising rates, allowing for further observation of the situation before making further decisions.

Looking at Personal Consumption Expenditure (PCE) Data

When examining the data on Personal Consumption Expenditure (PCE), both the overall PCE growth rate of 4.2% and the core PCE growth rate of 4.6% have already dropped below 5.0%. These figures are lower than the US dollar’s interest rates. Whether it is the real growth rate of personal disposable income, excluding inflation, at 4.0%, or the real growth rate of personal consumption expansion at 1.9%, the data indicates a return to positive growth. This demonstrates the efficacy of the Fed’s hawkish monetary policy in bringing down inflation, albeit at a slower pace. While achieving a substantial cooling of inflation will take time, short-term surges are unlikely.

Employment Situation and Associated Risks

The employment data, however, present a more challenging landscape. The US non-farm payroll has shown a stable growth trend, and initial claims for unemployment benefits have been reasonably well controlled. However, the number of continued claims for unemployment benefits has been on the rise.


In contrast, the number of job offers released by businesses reached its lowest point in over a year by February 2023. If the inflation rate is close to the interest rate and real interest rates have turned positive, maintaining interest rates could help avoid risks and further unemployment. This approach could potentially benefit the economy in the long run. The implementation of monetary policy requires time to observe its development. When the US began raising rates in early 2022, it was not until mid-2022 that inflation started to recede from its peak. Even if the Fed were to pause interest rate hikes in May 2023, inflation would likely remain relatively low for at least another quarter.

While the US economy faced recessionary pressures in the first half of 2022, it managed to rebound and show positive growth rates compared to the previous year.

The key question moving forward is when the Federal Reserve will halt its interest rate hikes and pause its hawkish monetary policy. Key indicators such as price volatility, inflation, and employment data play crucial roles in the Fed’s decision-making process.