How the Federal Reserve (Fed) reacts to signals in the economy can give us insights and inform our investment outlook.

The Federal Reserve Act mandates that the Fed conducts monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Employment is relatively high in the U.S., with unemployment rates historically low at around 3.7 percent. Inflation or price stability, however, has been tricky. Inflation has more than doubled the long-term average, and interest rate increases in the last 6-12 months have hit the brakes on 2022.

We know that year-over-year price increases in the goods and services we all consume are cutting into our purchasing power. This week's Market Perspective looks at the forces capable of bringing down inflation. These deflationary forces are largely outside of monetary policy and, yet, have a role in framing the urgency of the Fed's actions.

Deflationary Forces

• Aging Demographics. As retirees exit the workforce and move from wealth accumulation to wealth distribution, spending is generally lower.

• Slowing Labor Market. Fewer people working means less discretionary spending in the economy.

• Technology. The cost of goods and services broadly decreases over time as technology becomes more efficient and cost-effective.

Aging demographics and technology are more gradual deflationary forces. The labor market, however, is a more cyclical, shorter-term, and higher frequency indicator that the Fed is likely watching inform their next move.

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