Even the Fed doesn't know if there's going to be a recession next year

The Federal Reserve predicted that by the end of 2023, the US still won't see inflation at pre-pandemic levels. But it'll be a lot closer.

• The Federal Reserve raised interest rates by 0.5 percentage points on Wednesday.
• This was a slowdown from the previous hikes of 0.75 percentage points.
• But the Fed expressed uncertainty with 2023's outlook and couldn't say whether there will be a recession.

Uncertainty persists for the US economy as it heads into the new year.

The latest economic data from the Consumer Price Index found the economy is headed in the right direction — while inflation is undoubtedly still high, it declined in November to a year-over-year rate of 7.1%, a decrease from a 7.7% reading the month prior. The Federal Reserve responded to the promising data on Wednesday by raising interest rates 0.5 percentage points, which is still a significant hike but was a slowdown from the past four increases of 0.75 percentage points.

Still, the Fed's latest action brings up a question every American wants an answer to: Will there be a recession next year? And the nation's central bank simply does not know. 

"No one knows with any certainty where the economy will be a year or more from now," Fed Chair Jerome Powell said during his post-meeting press conference on Wednesday.

"I don't think anyone knows whether we're going to have a recession or not," Powell added. "And if we do, whether it's going to be a deep one or not, it's just, it's not knowable."

He noted that achieving a soft landing is still possible, in which the Fed can continue fighting inflation while avoiding an economic downturn, and that if lower inflation readings persist, "it could certainly make" a soft landing more possible.

Still, before the pandemic, inflation was at a 2% level, and Powell has stressed that the Fed will continue to raise interest rates until it sees the economy reaching that level. The Summary of Economic Projections the central bank released on Wednesday noted that the Fed thinks 2% will not be achieved by the end of next year — the projection is 2.8% by the end of 2023 — showing that while things are expected to get close to normal, Americans still won't be seeing the same stable prices they did before 2020.

This could dash President Joe Biden's hopes of price growth returning to its pre-pandemic level by the end of next year. In remarks following the release of the latest inflation data on Tuesday, Biden said that he hopes "by the end of next year we're much closer, but I can't make that prediction."

If the US does find itself in a recession, it's probably won't be as severe as many Americans might be used to. Insider previously reported that a recession next year could take the form of a growth recession, in which the economy experiences a shallow contraction while maintaining a strong labor market, and the latest jobs report bolstered the labor market's strength by adding more payrolls.

The Fed's economic projections also predict that the unemployment rate will rise to 4.6% by the end of next year, and gross domestic product (GDP) to experience 0.5% growth, which is another year of low economic growth. Notably, Fed participants were split when it came to GDP — some predicted the small 0.5% growth, while others saw the economy growing at a slightly higher level around 1%.

But the overarching theme of Powell's remarks on Wednesday was uncertainty — and that for the US to effectively fight inflation, Americans will need to continue experiencing a strain on their wallets for some more time.

"We continue to anticipate that ongoing [interest rate] increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time," Powell said during the Wednesday press conference.

He continued that while the latest inflation data was "welcome reduction to the monthly pace of price increases," it'll take "substantially more evidence to give confidence that inflation is on a sustained downward path."