Slower U.S. Economic Growth in Q1 2023, Inflation Improvement: What It Means for Borrowing Costs and the Federal Reserve’s Next Move

In the first quarter of 2023, the U.S. economy experienced a decline in economic growth rate, with Gross Domestic Product (GDP) expanding at an annualized rate of 1.6 percent, lower than the predicted 2.2 percent by economists. This marks the first time in over a year and a half that the growth rate fell below 2 percent. Despite this decline, there has been a noticeable improvement in inflation, which has increased to 3.5 percent year-over-year in March from its peak in June 2022 but is still below the Federal Reserve’s (Fed) target of 2 percent.

The unexpected rise in inflation, coupled with data on job growth and GDP, has given the Fed room to potentially lower borrowing costs. The central bank committee raised borrowing costs to a range of 5.25 to 5.5 percent in July after maintaining near-zero rates in March 2022. The Fed Open Market Committee (FOMC) will review the latest growth report and other economic indicators when they meet next week to determine whether they will lower borrowing costs or maintain them. They will also consider new data on the Fed’s preferred inflation index, the Personal Consumption Expenditures (PCE) index, set for release on Friday.

Despite concerns over high prices, the U.S. economy has shown resilience with job growth and prolonged periods of low unemployment rates since January 1968 – this is seen as a positive sign for the Federal Reserve as they aim for a strong economy without keeping prices too high.

While many economists predicted a recession last year, many now anticipate that the Fed will guide