EL SEGUNDO, Calif. — The Federal Reserve increased interest rates once again by half a percentage point on Dec. 15, 2022.

The rate now stands at 4.4% as officials attempt to tamp down inflation across the U.S. 

Leo Feler, a senior economist at the UCLA Anderson Forecast, told “Inside the Issues” host Alex Cohen that future actions by the Federal Reserve will determine the country’s economic outlook.

In the new year, the forecast predicts that two possibilities are equally likely, continued economic growth at a slower rate or a short and mild recession.

A recession is expected if the Federal Reserve continues to increase rates aggressively. If inflation worsens from this point onwards, the rate could increase to over 5.5%, which means mortgage rates will be higher, businesses will invest less and consumers will cut back on buying cars and appliances, Feler explained.

This will cause a short-lived recession that will help slow down inflation.

“It’s kind of like throwing out the baby with the bathwater. You throw out inflation but you also decimate certain parts of the economy. The big concern is that we might end up getting a recession as early as mid-2023,” he noted.

The U.S.’s second economic path is that inflation might disappear on its own. In this scenario, the UCLA Anderson Forecast expects the economy will continue to grow but at a much slower pace than the typical 2.4% rate.

Feler said while the country may approach an economic slowdown, it is not quite a recession.

“The reality is consumers have kept spending. Businesses have kept investing. That has allowed the economy to power through and to not actually experience this contraction that so many of us were projecting,” he stated.

However, even if a recession does not occur in 2023, UCLA predicts there will be a slowdown in housing. Unemployment rates also are expected to increase by a minor amount of 0.5%, but job growth will continue in the U.S., and particularly in California.

Feler said Californians may be buying less physical goods, but they are still actively spending on services, such as going out to dinner, attending sports games, buying concert tickets and traveling domestically to places like Lake Tahoe and wine country.

The forecast expects the service economy to remain resilient this year and next.

“You still see this hunger from people to travel to make up for all the experiences they weren’t able to have during the pandemic and coming out of the pandemic,” Feler added. “California is still this phenomenal destination for people to travel, for people to have wonderful life experiences.”

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