Fed poised to hold rates steady despite economy's bullish tone
Send a link to a friend
[November 01, 2023] By
Howard Schneider
WASHINGTON (Reuters) - Throughout its two-year battle with inflation,
the Federal Reserve has tried to squeeze consumers hard enough through
higher interest rates that they stop spending, bring demand in line with
supply, and drive U.S. economic growth below its potential to ease price
pressures.
It hasn't happened yet.
With financial markets expecting the U.S. central bank to keep interest
rates on hold at the end of a two-day policy meeting on Wednesday,
policymakers now have to judge whether the economy's
stronger-than-anticipated performance is a last gasp of the consumer
splurge that began during the COVID-19 pandemic, or evidence that
monetary policy still isn't strict enough to fully return inflation to
the Fed's 2% target.
Since the last policy meeting in September, when the central bank's
policymakers also left rates unchanged, incoming data has shown
stronger-than-expected job growth, stronger-than-anticipated economic
growth, and only sluggish improvement in the pace of inflation that, at
3.4% in September based on the Fed's preferred gauge, remains well above
the target.
There are reasons for the central bank to be, as policymakers have said,
"careful" in approving any further rate increases. Most notable are
market-based interest rates that have been driven higher by investors
independent of any action by the Fed: Yields on long-term U.S. Treasury
bonds have spiked since last summer and the average rate on a 30-year
fixed-rate mortgage has climbed to close to 8%, a level not seen in
nearly a quarter of a century. Ultimately, Fed officials feel these
developments will slow business and household spending.
But recent weeks have provided little clarity on when that might happen,
with long-awaited turns lower in hiring, housing inflation, services
spending and other key data points postponed by an economy that won't
quit.
Even the rise in bond yields, cited by some Fed officials as a
substitute for the central bank's own rate hikes, may simply be a
recognition of the economy's strength and an implicit sign the Fed may
have to do more to finish the inflation fight.
"We think real rates are higher due to very strong US growth," analysts
from Citi wrote ahead of this week's Fed meeting. "If we are right, the
Fed risks falling behind the real growth and inflation curve," even if
the economy slows from the torrid 4.9% annual pace seen in the third
quarter.
DOUR CONSUMERS STILL SPENDING
The U.S. central bank is due to release its latest policy statement at 2
p.m. EDT (1800 GMT). Fed Chair Jerome Powell will hold a press
conference half an hour later.
Investors consider it a near certainty that the central bank will keep
its benchmark overnight interest rate in the 5.25%-5.50% range that was
set at its meeting in July, with the odds also weighted against any
further increases moving forward.
With no updated economic or rate projections to be released at this
meeting, the focus will be on whether the new policy statement or
Powell's comments seem to lean toward or away from any more increases.
As of the September meeting, Fed officials said they still felt one more
rate hike would be necessary. If anything, the data since then has
likely left that door open.
Gross domestic product growth for the third quarter best exemplified the
risks the Fed is trying to parse, with pandemic-era savings, combined
with a low unemployment rate and ongoing healthy wage increases,
allowing consumers to keep fueling strong economic growth. That
countered concerns that developments like renewed student loan payments
and weakened consumer confidence would cause people to pull back.
[to top of second column] |
Federal Reserve Chairman Jerome Powell speaks during a meeting of
the Economic Club of New York in New York City, U.S., October 19,
2023. REUTERS/Brendan McDermid/File Photo
Instead, consumer-facing companies like McDonald's and Amazon have
delivered consensus-topping earnings, while home prices have
continued to rise despite the high mortgage rates.
Since pandemic-era programs pumped trillions of dollars into
household bank accounts, economists have tried to come to terms with
when those extra savings would be exhausted. After the U.S.
government reported the eye-popping third-quarter economic growth
reading last week, some analysts reassessed and suggested there was
still perhaps $1 trillion left to feed consumption and, potentially,
higher prices.
"Given the resilience of the consumer, the risk in the near-term may
be for a faster drawdown," wrote Nancy Vanden Houten, lead U.S.
economist at Oxford Economics. "Much is made of so-called 'revenge
spending' ... there may be more room to run," she said in a
reference to the surge in spending that has occurred during the
recovery from the pandemic.
Spending has kept growing despite consumer confidence levels that,
according to the Conference Board, have dipped to recessionary
levels amid a host of concerns.
"Consumers continued to be preoccupied with rising prices in
general, and for grocery and gasoline prices in particular," Dana
Peterson, the Conference Board's chief economist, said on Tuesday
after the business group reported that its consumer expectations
index for October remained below a level that has typically signaled
a coming recession. "Consumers also expressed concerns about the
political situation and higher interest rates. Worries around
war/conflicts also rose, amid the recent turmoil in the Middle
East."
All of that has been on the Fed's mind as well.
Powell has said in recent months that he feels Fed policy is
generally working "as expected," with higher borrowing costs and
stricter financial conditions to eventually slow the economy, but
with the timeline perhaps slowed by lingering pandemic impacts like
the savings bulge and a deep misalignment between supply and demand,
particularly for labor.
What's underway, in other words, may just be a slow, grinding
adjustment back to the 2% inflation target, something the Fed would
not want to rush if the alternative is a large rise in joblessness
and an unnecessary recession.
But Powell has also said growth needs to slow - and if it doesn't,
it means the Fed's policy rate will need to move higher.
"It's a good thing that the economy's strong. It's a good thing that
the economy has been able to hold up under the tightening that we've
done. It's a good thing that the labor market's strong," Powell said
at his press conference following the end of the Sept. 19-20 policy
meeting. But "if the economy comes in stronger than expected, that
just means we'll have to do more in terms of monetary policy to get
back to 2%. Because we will get back to 2%."
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
[© 2023 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.
|