Fed watchers, bankers, economists, and money managers got exactly what they expected about the direction of interest rates from the Federal Reserve Wednesday following its Open Market Committee meeting.
That doesn’t mean there was no news.
The Fed, as expected said it will maintain its target range for the federal funds rate at 5.25% to 5.5%, as recent economic indicators show a mix of promising and concerning signals. But it was the tea leaves reading on future prospects and conditions that was most attention worthy.
Data to dictate any future change
Toward that end, it appears Fed is poised to make at least one more tweak in interest rates before the end of the year, but Chairman Jerome Powell said that final decision by the board of governors would be dictated by data.
“Really what people are saying is let’s see how the data come in,” Powell said.
And for the moment, the data isn’t too bad, and in some cases surprisingly good.
In its policy statement, the Fed noted the U.S. economy has been expanding at a solid pace. Though the labor market has shown signs of moderation with slower job gains in recent months, the unemployment rate remains at historically low levels. The most pressing concern highlighted in the statement is the persistence of elevated inflation levels, which continues to be a cause for vigilance among policymakers.
“The economy has been stronger that many expected,” Powell said during a Q&A session following release of the policy statement. “Household and business balance sheets have been stronger than we understood; savings rates have come down a lot. And it also could be our policies haven’t been restrictive enough. Nonetheless we’re making progress, growth is strong, employment is coming back.”
Powell: 'Soft landing' still the objective
A so-called “soft landing,” in which inflation eases and the economy tightens but does not set off a recession, is still the Fed’s primary objective, Powell said. And it appears its economic wrangling is working and may achieve the Fed’s goal of reducing inflation to a 2% level, from its current level above 3%, although it might take a little longer than initially expected.
But there’s admittedly a lot on the horizon that could upset the Fed’s somewhat rosy outlook. Powell ticked off a list of factors looming that could throw the economy off track that included the autoworkers strike, a potential government shutdown, the resumption of student loan payments, higher long-run interest rates and a recent jump in oil prices.
“That’s a long list,” he noted.
There’s also concern about tighter credit conditions affecting both households and businesses, which could potentially weigh on economic activity, hiring, home buying, and inflation. The extent of these effects remains uncertain, adding a layer of complexity to monetary policy decisions.
“We are clearly in the flat portion of a bicycle race—the rapid ascent is mostly behind us, but we may be peddling for a while before we see any sign of a gradual descent,” said Marty Green, principal at mortgage law firm, Polunsky Beitel Green. “In my view, this means the mortgage interest rate environment will continue to bounce sideways through the next several months.”
Signs of consumer angst
Indeed, there are signs of some consumer angst and troublesome trends, that Powell acknowledged. He noted the rising number of auto loans in default, the Census Bureau’s high-frequency measurement for food insecurity and that a lot of consumer spending has been fueled by high interest credit cards.
Rising prices, he said, most acutely affect low fixed-income people since they’re spending almost all their money on food, fuel, and housing.
“It is for those people, as much as for anybody, that we need to restore price stability,” he said. But he added that things may be moving back to more normal pre-pandemic levels and currently they’re not troublingly high.
“We believe the Fed has reached its terminal policy rate of this cycle, but the risk of further inflation surprises and ongoing strength in economic activity suggests policymakers will remain hawkish in their communications and tighten further if appropriate,” said Thomas Holzheu, chief economist Americas Swiss Re Institute.
More than half of the rise in the headline Consumer Price Index stemmed from higher gasoline prices tied to oil supply cuts by OPEC, Holzheu said.
“If this were to go on, we could see upward pressure build on both headline and core inflation metrics, but we expect slowing global demand will temper the current increase in oil prices over the span of [the first half] of 2024,” he said.
The Federal Reserve reiterated its commitment to reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as previously announced. This measure is intended to help achieve the Committee's inflation objective.
“Powell seemed determined not to make any news today,” quipped a reporter following Powell’s press conference. “And he largely seems to have succeeded.
The Fed has two more chances to make news (in October and November) and decide on further interest rate hikes.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].