Which recession The Fed is asking big questions about the

Which recession? The Fed is asking big questions about the economy’s staying power.

Employers hire quickly. Home prices across the country are rising after months of decline. Consumer spending rose more than expected in a recent data release.

The US economy is not experiencing the sharp downturn that many analysts had expected given the Federal Reserve’s 15-month, often aggressive campaign to slow growth and bring rapid inflation under control. And this surprising resilience could be either good news or bad news.

The staying power of the economy could mean that the Fed will be able to gently rein in inflation and slow price rises without plunging America into some sort of recession. However, if companies manage to keep raising prices without losing customers amid solid demand, it could keep inflation too high – forcing consumers to pay more for hotels, groceries and childcare, and forcing the Fed to do even more to slow growth.

Policymakers may need time to figure out which scenario is more likely so they can either overreact and cause unnecessary economic damage, or underreact and allow rapid inflation to become permanent.

Against this backdrop, investors have been betting that Fed officials will not hike rates at their Tuesday and Wednesday meetings and then hike again in July. They are proceeding cautiously but stressing that pausing does not mean stopping – and that they remain committed to bringing prices under control. But even that expectation is faltering: Markets have spent this week increasing the likelihood that the Fed could hike rates at its meeting later this month.

In short, the mixed economic signals could make Fed policy discussions tricky in the coming months. Here is the state of affairs.

Interest rates are above 5 percent, the highest since 2007.

After drastically adjusting monetary policy over the past 15 months, key officials, including Fed Chair Jerome H. Powell and President Biden’s pick for the next Fed Vice Chair Philip Jefferson, have hinted that central bankers may pause, to give yourself time to judge how the increases are affecting the economy.

But this assessment remains complex. Even some parts of the economy that normally slow when the Fed hikes rates are showing a surprising ability to withstand today’s interest rates.

“It’s a very complicated and confused picture depending on what data points you look at,” said Matthew Luzzetti, chief US economist at Deutsche Bank, noting that headline growth numbers like gross domestic product have slowed — but other key numbers have been stable remain.

It may take months or even years for higher interest rates to take full effect. In theory, however, they should kick in pretty quickly and start slowing down the auto and real estate markets, which are big borrowed-money purchases.

This time the story was complicated. Auto buying has slowed since the Fed began raising rates, but the auto market has been so undersupplied in recent years — thanks in large part to pandemic-related supply chain problems — that the slowdown has been bumpy. Housing construction has also confused some economists.

The real estate market weakened significantly last year as mortgage rates soared. But interest rates have stabilized recently and house prices have risen again on the back of low inventories. House prices don’t feed directly into inflation, but their turnaround is a sign that much is needed to cool down a hot economy on a sustained basis.

Fed officials are also watching for signs that their rate hikes are having an impact on the economy and slowing the job market: as expansions become more expensive to finance and consumer demand weakens, companies should scale back hiring. With less competition for workers, wage growth is likely to moderate and unemployment to rise.

There are some indications that the chain reaction has started. Initial jobless claims rose last week to their highest level since October 2021, a report on Thursday showed. People at private employers are also working fewer hours per week, suggesting that bosses aren’t trying to squeeze as much out of existing staff.

But other signals were more muted. Job vacancies had declined but picked up again slightly in April. For low-income earners, wages aren’t rising as fast, but growth remains unusually fast. The jobless rate rose to 3.7 percent from 3.4 percent in May, but even that was still well below the 4.5 percent that Fed officials had expected in their latest economic forecasts through the end of 2023. Officials will release new forecasts next week.

And in some respects the labor market is still buoyant. New hires remain particularly strong.

“Everyone is talking as if the economy is moving in a straight line,” said Nela Richardson, chief economist at ADP. “Actually, it’s lumpy.”

Still, inflation itself could be the biggest wild card affecting Fed plans this month and this summer. Officials forecast in March that annual inflation, as measured by the index of personal consumption spending, would fall to 3.3 percent by the end of the year.

This retreat is gradual. Inflation was 4.4 percent in April, down from 7 percent last summer but still more than double the Fed’s 2 percent target.

On the first day of their meeting next week, officials will receive a corresponding and more recent reading of inflation for May – the consumer price index.

Economists are expecting a significant slowdown, which could give officials confidence to pause rates. If those predictions are thwarted, however, the debate over what comes next could become even more heated.