December 2022 National Economic Outlook

Fed Tightening, But at Slower Pace; Job Market Remains Very Tight

Executive Summary

At its meeting on December 13 and 14, the Federal Open Market Committee (FOMC) raised the federal funds rate by 50 basis points, to a range between 4.25% and 4.50%. This followed rate hikes of 75 basis points at each of the four previous FOMC meetings. The fed funds rate started the year between 0.00% and 0.25%; the Fed has tightened monetary policy very aggressively in response to inflation that is well above the central bank’s 2% objective, even as inflation has slowed in recent months. 

The central bank has also reduced the size of its balance sheet this year, pushing up long-term interest rates. According to projections released along with the monetary policy statement, FOMC participants are indicating further fed funds rate hikes in 2023, with the rate expected to end 2023 above 5%.

Job growth remains very strong at the end of 2022. The U.S. economy added 263,000 jobs in November according to a survey of employers, with job growth in the three months through November averaging 272,000, well above the pre-pandemic pace. The private sector added 221,000 jobs in November, while government employment rose by 42,000. The unemployment rate was 3.7% in November, unchanged from October and up from 3.5% in September, matching a 50-year low. Employment in a survey of households (different from the survey of employers) fell by 138,000 in November, the second straight drop. 

The labor force—the number of adults working or looking for work—contracted by 186,000, while the labor force participation rate—the share of adults in the labor force—fell to 62.1%, from 62.2% in October.  While the labor force participation rate has improved from 60.2% in April 2020 at the worst of the pandemic, it has been just above 62% throughout 2022, about a full percentage point below its pre-pandemic level. The post-pandemic labor market is structurally tighter than the pre-pandemic one.

Real GDP increased 2.9% at an annual rate in the third quarter, according to the second estimate from the Bureau of Economic Analysis. This followed small declines in economic output in the first two quarters of 2022, and real GDP is now slightly above where it was at the end of 2021. 

Trade was a huge contributor to third quarter growth, adding 2.9 percentage points to annualized growth, as exports rose and imports declined (lower imports add to GDP). Consumer spending, business investment (excluding inventories), and government purchases also added to growth in the third quarter. Housing was a major drag as high mortgage rates weighed on residential construction, and inventories were also a negative.

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December National Economic Outlook

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