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The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022 in Washington, DC.
Washington, D.C. CNN –
The Federal Reserve is widely expected to announce at the end of its policy meeting on Wednesday that it will keep interest rates stable, at their highest level in 22 years. This would be the second meeting in a row where the Fed has left interest rates unchanged.
But that doesn’t mean the Fed is done raising interest rates. Fed Chairman Jerome Powell has made it clear that the US central bank wants to reserve the option of raising interest rates further in case data shows that the decline in inflation has stalled.
“Given the uncertainties and risks and how far we have come, the committee is proceeding cautiously,” Powell said in New York last month. “We will make decisions about the extent of further policy tightening and how long policy will remain restrictive based on the totality of incoming data, the evolving outlook and the balance of risks.”
Another rate hike could come during the Fed meeting on December 12th and 13th and would likely be the last in this cycle. Fed officials projected another interest rate hike this year in their economic forecasts released in September, but the central bank could forego this latest increase if data in the coming weeks show that inflation continues to cool despite strong economic growth and jobs The market remains tense.
Still, hawkish Fed officials — those who favor a more aggressive approach to fighting inflation — believe there is more room to raise interest rates.
“Inflation remains well above that [committee’s] 2% target. “Domestic spending remains at a strong pace and the labor market remains tight,” Fed Governor Michelle Bowman said in Morocco last month. “This suggests that the federal funds rate may need to be raised further and remain restrictive for some time to bring inflation back in line with the FOMC’s target.”
The Fed’s preferred inflation indicator – the personal consumption expenditures price index – cooled only slightly in September. The core index, which excludes food and energy prices, rose 3.7% in the 12 months to September, compared with 3.8% in August.
The Fed still appears to have a chance of tackling inflation without causing a sharp rise in unemployment – a scenario known as a “soft landing.”
But for now, the central bank is performing a balancing act between the risk that inflation could rise again and the risk that its actions could cause unnecessary economic damage.
Despite the Fed’s 11 rate hikes since March 2022, the US economy has demonstrated remarkable resilience. Economic growth grew 4.9% annualized in the third quarter, the strongest rate in two years, with consumer spending, America’s economic engine, growing at its fastest pace since 2021.
Meanwhile, employers continued to add solidly, adding 336,000 jobs in September, the largest monthly gain since January, while the unemployment rate remained at a low 3.8% for the month. The Ministry of Labor will publish October data on the assessment of the labor market this Friday.
Worker claims for unemployment benefits remain at historically low levels, workers continue to see solid wage gains, and job vacancies continue to outpace the number of unemployed people actively looking for work by millions.
“Inflation has continued to fall despite strong wage growth and a strong economy, suggesting that businesses have been able to cope with high costs and I think inflation will continue to fall,” said Luke Tilley, chief economist at Wilmington Trust, told CNN. “The economy is experiencing a soft landing.”
Instead of being in the middle of a recession, as economists predicted after the banking crisis in the spring, the US economy is doing well.
But that resilience will certainly be tested. Powell said that rising bond yields are currently playing an important role in putting the reins on the economy as Treasury bonds are the benchmark for pricing debt. This means that higher yields lead to higher interest rates on auto loans and higher costs for mergers and acquisitions, for example.
Banks have also tightened their lending standards, and last month’s resumption of student loan payments means Americans’ budgets are being squeezed. Some research also suggests that U.S. consumers have likely already drawn down the excess savings that many had accumulated during the pandemic.
The U.S. economy is also struggling with two wars, trillions of dollars in federal debt, a frozen housing market and geopolitical tensions in the Middle East that could cause oil prices to rise if the war between Israel and Hamas escalates.
The economic situation has clearly become more difficult since the start of the year, but some economists remain optimistic about the economy’s resilience and the defeat of inflation.
“A resilient consumer and a stable labor market could potentially help the Fed create one of the greatest comebacks ever — an economy that grows and lowers inflation,” Nela Richardson, chief economist at payroll processor ADP, wrote in a note.