The Federal Reserve is anticipated to maintain its benchmark lending rate this week as it awaits additional data to determine the impact of previous rate increases on the US economy. In July, the central bank raised interest rates to a 22-year high.
At the conclusion of its two-day policy meeting on Wednesday, the Fed is also expected to disclose a new set of economic projections that are likely to reflect stronger economic growth and slightly lower unemployment this year than previous projections. The new economic forecasts of government officials will likely indicate at least one additional rate hike this year. There appears to be a consensus among Fed officials that holding rates constant this month is the appropriate course of action; however, some have speculated that the Fed may raise rates again after September.
Investors will be looking for indications that the Fed is done raising interest rates, but Fed Chair Jerome Powell will likely emphasize that inflation remains unacceptably high in his post-meeting news conference. This would leave the door open for another rate increase, which could be implemented at the conclusion of the subsequent meeting on November 1. According to the CME FedWatch Tool, there is a 69% probability that the Fed will continue to pause rate increases in November.
Why the Fed will likely take a break
Inflation and the labor market have slowed consistently over the past year, allowing the Fed to hold rates steady and await additional data. Despite ongoing volatility in energy markets, inflation is also expected to keep slowing in the coming months, mostly due to easing auto prices and rents. Combined, these factors give officials sufficient confidence to halt rate hikes without jeopardizing a resurgence in inflation.
Christopher Waller, governor of the Federal Reserve, told CNBC earlier this month before the latest Consumer Price Index showed that higher petroleum prices pushed up headline inflation in August, that “nothing indicates that we need to act imminently.” We can do nothing but wait for the data.
The last time central bank officials decided to maintain rates was in June, during a period of escalating ambiguity regarding the extent to which the spring banking crisis would restrict lending. When it became evident that the economy was not being negatively impacted by the turbulence, the Fed raised interest rates again in July.
There is also the argument that the central bank has already raised interest rates sufficiently to eventually constrain the economy and bring inflation down to the Fed’s 2% objective.
John Williams, president of the New York Fed, told Bloomberg earlier this month, “We have monetary policy in a very good place.”
Even though the Fed is comforted by inflation’s consistent deceleration and the outlook, the central bank still faces a number of future uncertainties.
The Fed desires to combat inflation without inflicting unwarranted economic injury that would increase unemployment. However, although rising interest rates began to have an immediate impact on the housing market, officials are still attempting to determine the effect on economic growth, consumer expenditure, and employment.
According to research, it can take at least a year for these effects to take complete effect, and it’s been about a year and a half since the Fed began raising interest rates. In a recent paper, researchers from the Chicago Fed argued that rate hikes have already filtered through the economy and that inflation could reach the Fed’s 2% target by mid-2024 without a recession, given the present level of interest rates.
A potential government shutdown that prevents the publication of important inflation and employment data could also be problematic for the central bank.
In the event of a government shutdown, the Bureau of Labor Statistics will cease to release data, including critical inflation and unemployment figures. This dearth of essential government data would make it more challenging for investors and the Federal Reserve to interpret the U.S. economy.
Greg Valliere, principal US policy strategist at AGF Investments, stated on Tuesday that the probability of a government shutdown has increased to 70%. On Tuesday, Valliere wrote in a note that the prospective shutdown could be “long and last into the winter.”
The threat posed by rising energy prices, which have driven up gas prices in recent weeks, is another economic wild card. The average price of regular gasoline is presently $3.88 per gallon, according to AAA.
In theory, elevated energy prices could contribute to core inflation — which Fed officials are more concerned with — if these prices remain elevated for an extended period of time, thereby driving up the cost of airfares and freight. Moreover, it may influence inflation expectations.
Mark Zandi, chief economist at Moody’s Analytics, told CNN: “The Fed is obviously most focused on core, but they won’t ignore what’s happening with energy prices, especially if higher gasoline prices begin to affect inflation expectations and wage demands, which is a real possibility.”
The Fed will also keep a close eye on the ongoing United Auto Workers strike, primarily due to its implications for the labor market rather than its potential economic impact.
Andrew Patterson, senior international economist at Vanguard, stated, “The Fed believes the UAW strike is merely another indication that the labor market remains relatively tight.”
“They believe that when you start to see these strikes, like we did with the railroads, it’s a sign of relative labor market strength, so workers feel empowered to go on strike.”
Wednesday at 2:00 p.m. ET, the Fed will announce its September policy decision, followed by a news conference led by Fed Chair Jerome Powell at 2:30 p.m. ET.