Some optimistic Fed can hit elusive 2% inflation target in early 2024

While its 2% inflation target is proving elusive, money managers, economists, and fiduciaries generally believe the Federal Reserve’s efforts to tamp down rising prices are working and most hold out hope for achieving the goal by early next year.

Federal Reserve Chairman Jerome Powell speaking at the Kansas City Fed’s annual symposium in August said the central bank would likely hold on interest rate increases for now, but said the Fed would not hesitate to push them up if the economy shows more signs of rising inflation.

Days later, new data from the fed showed inflation had done just that, ticking up to 3.3% in July, up 3% from its last report. The increase probably wasn’t enough to spur an immediate increase in interest rates but neither did it signal that declines might be coming.

The Fed 'intends to be patient'

“Chairman Powell wanted markets to understand that the Fed intends to be patient and measured in its approach to policy from here,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green. “To use a medical analogy, the inflation infection is getting more under control for now, but that could easily change. The Fed intends to keep the medicine of higher rates on the table and has no plans to reduce the dosage any time soon. In fact, it may increase the dosage before reducing it.”

Green said those anticipating reductions in interest rates in the immediate future “may need to revisit their forecasts.”

The economy, though, is proving resilient in the face of rising inflation. Employment remains solid with a jobless rate around 3% and wages are clicking upward, allowing consumers to spend more money, which in turn fuels inflation because it convinces businesses they can continue to charge higher prices. New consumption data showed that personal spending climbed by an unexpected 0.8 percent in July from the month before.

“Confidence is the cheapest stimulus for the economy and business planning, but the Fed wants to walk and talk the fine line between confidence and over-confidence,” said Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “If the U.S. enters a recession soon, it would be a most unusual recession with plentiful credit, low unemployment, and above average inflation—noteworthy dynamics not normally associated with an economic slowdown.”

2% inflation rate target cited

Most observers said the Fed likely won’t meet its 2% inflation rate target until early next year, if at all. But that might be ok.

“Historically, 3% inflation rate was not bad at all,” said Dr. Tenpao Lee, professor emeritus of economics at Niagara University. “Theoretically, the Fed's 11 rounds of rate hiking will have a diminishing marginal effect on inflation. As a result, the Fed probably should maintain current interest rate levels as higher interest rates may enhance the risk of a recession.”

Business lenders, however, say continuing inflation and higher interest rates are pummeling small businesses.

"The current situation is putting a profitability crunch and a credit crunch at the same time," said Rohit Arora, CEO of Biz2Credit and a leading expert on small business lending, "After the collapse of Silicon Valey Bank, confidence is shaken in the banking system. Big banks typically did not do as many small business loans as smaller banks, and smaller banks are having a hard time attracting deposits."

To find capital, small companies are turning to alternative lenders, which are more likely to say yes, but the interest rates are higher,” Arora said.

It may take more time, economists said, to fully appreciate the efforts Powell and Fed have made in battling inflation and avoiding a recession.

Role as 'chief inflation fighter'

“After declaring inflation as being ‘transitory’ in nature in 2021, the Fed is eager to re-establish its credentials as being serious in its role as being the chief inflation fighter,” said Gerald Goldberg, CEO and co-founder at GYL Financial Synergies. “Since March, 2022, the Fed has already moved interest rates dramatically while at the same time it has been shrinking its balance sheet. While this has already brought down inflation, it may still take some time to recognize the full impact of the monetary policy already employed. It is better to pause; be data dependent; and tighten further if necessary.”

Which is exactly the strategy Powell seemed to encourage at his symposium speech.

“Given how far we have come, at coming meetings we are in a position to proceed carefully, as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” Powell said in a scripted speech.

Fed watchers interpreted Powell’s remarks as a sign no rate increases were contemplated at this time.

“The market continues to expect a pause for the September Federal Open Market Committee meeting,” said Rajeev Sharma, managing director of fixed income at Key Private Bank. “That being said, Fed chair Powell continued to reiterate that the Fed’s job is not done and is prepared to raise rates if appropriate.”

The economy needs to cool a bit more for inflation to recede, Sharma said.

“Therefore, our short-term outlook remains that the Fed Funds rate will remain elevated in the near term,” he added. “Data will continue to shape our long-term outlook and prospects of a Fed pivot.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].