The Federal Reserve is expected to keep its key rate stable this week while awaiting more data to understand the impact of previous rate hikes on the US economy. The central bank raised rates in July to their highest level in 22 years.
At the end of its two-day policy meeting on Wednesday, the Fed is also expected to release a new set of economic projections that will likely reflect stronger economic growth and slightly lower unemployment this year, compared to previous estimates. New economic projections from officials will likely show at least one more rate hike this year. There appears to be consensus among Fed officials that keeping rates steady this month is the right move – but some have said the Fed could raise rates again after September.
Investors will be looking for signs that the Fed is done raising rates, but Fed Chairman Jerome Powell will likely emphasize at his post-meeting news conference that inflation remains unacceptably high. This would leave the door open for another rate hike, which could take place at the end of the next meeting on November 1. Financial markets currently estimate that there is a 69% chance that the Fed will continue to suspend rate hikes in November, according to the CME FedWatch tool.
Inflation and the labor market have both slowed steadily over the past year, giving the Fed enough room to keep rates steady and wait for new data. Despite continued volatility in energy markets, inflation is also expected to continue to slow in the coming months. , mainly due to falling car prices and rents. Overall, these factors provide enough reassurance to policymakers that they can pause rate hikes without risking a resurgence in price increases.
“There’s nothing that says we need to do anything imminently in the near future,” Fed Governor Christopher Waller told CNBC earlier this month, before the latest consumer price index showed that rising gasoline prices helped drive up overall inflation in August. “We can just sit there and wait for the data.”
The last time central bank officials decided to keep rates steady was in June, as uncertainty grew over how much of a strain the spring banking crisis might have on lending. When it became clear that the economy was not being hit by this turbulence, the Fed raised rates again in July.
There’s also the argument that the central bank has already raised rates high enough to ultimately rein in the economy and bring inflation back to the Fed’s stated goal of 2%.
“Our monetary policy is in a very good position,” New York Fed President John Williams told Bloomberg earlier this month.
But even if the Fed is reassured by the continued slowdown in inflation – and by the outlook – the central bank still faces a number of uncertainties on the horizon.
The Fed wants to defeat inflation without inflicting unnecessary economic damage that would also drive up unemployment. But while rising interest rates began to affect the housing market almost immediately, authorities are still trying to assess the impact on economic growth, spending and the job market.
Research shows it may take at least a year for these effects to fully manifest, and it’s already been about a year and a half since the Fed started raising rates. Researchers at the Chicago Fed argued in a recent paper that rate hikes have already spread through the economy and that inflation could return to the Fed’s 2% target by mid-2024 without recession, at current rate levels.
A possible government shutdown preventing the release of key inflation and employment data could also pose a problem for the central bank.
In the event of a shutdown, the Bureau of Labor Statistics says it will stop publishing data, including key numbers on inflation and unemployment. This lack of crucial government data would make it even more difficult for investors and the Federal Reserve to interpret the U.S. economy.
Greg Valliere, chief U.S. policy strategist at AGF Investments, said Tuesday he now sees a 70% chance the government will be shut down. The potential shutdown could be “extended until winter,” Vallière wrote in a note Tuesday.
Another economic wild card is the threat posed by rising energy prices, which have driven up prices at the pump in recent weeks. The national average for regular gas is currently $3.88 per gallon, the highest price since October 2022, according to AAA.
In theory, high energy prices could fuel underlying inflation — which Fed officials are focusing more on — if those prices stay high long enough, driving up prices for airline tickets and freight . More importantly, it could affect inflation expectations.
“The Fed is obviously mostly focused on core business, but it’s not going to ignore what’s happening with energy prices, particularly if rising gas prices start to affect inflation expectations and wage demands, which is a real possibility,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.
The Fed will also monitor the ongoing United Auto Workers strike, primarily because of what the strike reflects in the labor market, rather than its possible economic impact.
“The Fed believes the UAW strike is just another sign that the labor market remains relatively tight,” said Andrew Patterson, senior international economist at Vanguard.
“They think that when you start to see these strikes – like we saw in the railways for example – it’s a sign of relative strength in the labor market, so workers feel they can to strike.”
The Fed is expected to announce its September policy decision on Wednesday at 2 p.m. ET; followed by a press conference at 2:30 p.m. ET, led by Fed Chairman Jerome Powell.