My economic outlook, as an undergrad student, is not optimistic but not bleak either, somewhere in the middle. In short, inflation is high (partially from factors the central bank can control) and unemployment is stable around estimates of the natural rate. 

Before getting into the nitty gritty, I want to answer 3 questions to give some background that will help paint the full picture of the economy: what’s the Federal Reserve? What’s the dual mandate? How does the Fed affect the dual mandate?

To the first question, the Federal Reserve (or “Fed”) is the central bank of the United States. Among other responsibilities, their role is essentially to make sure the economy is operating in a sustainable way. If you compare the economy to the story of goldilocks, the Fed is the porridge chef making sure the economy is “just right” on the whole. An economy too hot risks prices faced by consumers increasing too much; an economy too cold risks more joblessness than we’d prefer. 

Now that we have a (very simplified) idea on what the central bank does, we have to define what “just right” is when it comes to an entire economy. The Fed uses the dual mandate to measure the temperature of the porridge by focusing on two macroeconomic phenomena. The first is inflation, which is the general increase in prices and services faced by households and firms. Although there are a number of measures, the Fed’s goal is 2% annual change in the Personal Consumption Expenditures Price index. The second is unemployment, for which the Fed does not have a set target, but an ever-changing opinion on where we ought to be; this level of unemployment which is suspected to keep inflation steady at the Fed’s goal is called the natural rate.

The Fed achieves their dual mandate goals by conducting monetary policy, with the use of their administered interest rates. This policy affects how easy it is to move cash within the economy and can either heat it up or cool it down as a result. To keep it brief, raising interest rates slows down the economy by making it more expensive to borrow, ultimately locking up money; the opposite is true for decreasing interest rates.

On to the economic outlook:

The war in Iran is reducing the oil supply which is pushing up the price. Since oil is a large input cost for firms, and firms don’t want to reduce profit margins, prices go up, increasing inflation. Unfortunately, the Fed can’t produce more oil with their interest rates, so responding to this inflation with monetary policy could cause other aspects of the economy to suffer. Inflation that the Fed can control, shown by inflation measures which exclude food and energy prices, dubbed “core” inflation measures, is lower than measures which include these usually volatile elements: this signals that some of the inflation we are seeing is out of the Fed’s hands begging the question “why try to combat inflation if we can’t do anything about it?” 

While this is a valid concern, when we look at the Bureau of Economic Analysis’ breakdown of GDP in the US, an indicator which moves the same direction as inflation, consumer spending is largely contributing to output above estimates of natural output, as it makes up around ⅔ of GDP. (The concept of a “natural rate” is once more used, however this time it is applied to GDP. Output above natural contributes to increases in inflation. For a more in-depth explanation see this article by the St. Louis Federal Reserve.) Another factor contributing to a positive output gap is the large investment stemming from AI, which ultimately has two-fold consequences to inflation. Although investment is only a portion of output, much of it is made up of information related. This growing sector has also contributed to consumption spending, as when individuals see things they own increase in value, they often feel wealthier and are more likely to spend money. Technology makes up a large share of the companies in the S&P 500 Index, which is essentially a thermometer for the stock market, and the large growth in this sector is helping to prop up asset values relative to their historical norms. This high demand for consumption, and strong AI investment is within the Fed’s control and could both be curbed with an increase in interest rates. 

Turning to the other leg of the Fed’s dual mandate, the labor market has been relatively stable since 2025. The unemployment rate, which is calculated as the total number of unemployed individuals as a share of the total labor force, has stayed within between 4% to 4.5% since January 2025. This is only one metric however, and defined as the intersection between labor supply and labor demand. Labor supply, or the amount of workers available to work, has fallen in the US. This is partly from older workers retiring and leaving the workforce, and partly from immigration policy reducing the amount of possible workers being let into the country. Other measures of labor supply, such as the labor force participation rate (LFPR) which measures everybody employed and unemployed as a share of the total available working population, have either fallen or stagnated also resulting from the previously mentioned demographic trends. Labor demand, or firms’ willingness to hire workers, has also cooled, with fewer job openings and slower hiring than in the years right after the pandemic. Because labor supply and labor demand have both fallen together, the unemployment rate has held steady even though the labor market has become less dynamic. Firms aren’t hiring much, but they aren’t laying off much either. This suggests unemployment is sitting close to the natural rate, so the labor side of the dual mandate isn’t the Fed’s biggest worry right now.

Putting it all together, the porridge is running a little hot. Inflation is above the Fed’s 2% goal, and while part of that comes from an oil supply shock the Fed can’t fix, part comes from strong consumer spending and AI-driven investment that monetary policy can influence. With the labor market stable, the Fed has room to keep interest rates elevated, or even raise them, to cool demand without much immediate risk to jobs. The only thing is that tightening during a supply shock can slow the economy more than intended, especially if higher energy costs are already affecting households and firms. That tension is why my outlook lands in the middle: the economy isn’t in trouble, but getting it back to “just right” will take a careful hand from the Fed.