- The Fed will announce on Wednesday whether it will raise interest rates or keep them steady.
- Most economists predict that there is going to be a pause in rate hikes.
- One economist said the US is going through a “soft landing summer” amid strong GDP growth.
The country’s central bank may ease its fight against inflation in its next major decision this week.
On Wednesday, the Federal Open Market Committee will announce whether it will raise interest rates again or impose a freeze. The decision comes after inflation rose again in August – the consumer price index rose 3.7% year-on-year – indicating that the Fed still has work to do to reach its 2% inflation target, and Another interest rate increase may be suggested. Stay on the horizon this year.
After the Fed raised interest rates by 25 basis points in July, however, Federal Reserve Chairman Jerome Powell said he was no longer predicting a recession for 2023 and that the economy could achieve a “soft landing”, meaning Meaning that inflation comes down while avoiding severe inflation. financial crisis.
“We’ve come a long way,” Powell said at a July press conference. “We remain firmly committed to returning inflation to our 2% target over time.”
Many economists agree with Powell’s sentiment and are expecting a cap on the hikes. As Goldman Sachs chief economist Jan Hatzius said recently at NYU’s Stern Economic Outlook Forum, it has been a “soft landing summer.”
“I think what we’ve seen, especially over the last few months, strongly supports our soft landing views,” Hatzius said.
Why are economists feeling good about the economy?
The labor market is still strong but cooling to a more sustainable level, which is exactly what the Fed wants to see. The unemployment rate rose slightly, from 3.5% in July to 3.8% in August, but the bulk of that increase was from people coming in from the sidelines and re-entering the labor force.
Job growth has slowed over the summer but remains above the pre-pandemic average. Nick Bunker, director of economic research for North America at Indeed Hiring Lab, told Insider after the Bureau of Labor Statistics’ labor market report earlier this month that job growth and wage growth are broadly declining.
“On the direction, the data is moving the way the Fed wants to see, and it’s not at a level they’re probably comfortable with,” Bunker said.
Julia Pollack, chief economist at ZipRecruiter, told Insider she believes the Fed will be “very pleased” with that BLS report.
“This may suggest that yes, raising interest rates has slowed the labor market, but that this slowdown has mostly come in the form of declining opportunities, not job losses and rising unemployment,” Pollack said.
Job opportunities have become cold in the last year. There were about 11.4 million job vacancies in July 2022, but there were 8.8 million vacancies last July. This is the lowest number of monthly openings so far this year.
Hatzius also said at the NYU forum that “we’ve seen a huge rebalancing of the labor market.” Powell also alluded to rebalancing in his speech at the Jackson Hole economic symposium but said it is “incomplete.”
“The rebalancing of the labor market has occurred very painlessly through a large decline in job opportunities, very little increase in the unemployment rate, and very little decline in employment relative to the labor force,” Hatzius said.
Mixed outlook for the next 12 months
Hatzius said Goldman Sachs expects GDP growth next year to be 1.9%, with only a 15% chance of a recession over the next 12 months. Hatzius said that “monetary policy tightening operating through tight financial conditions is largely a thing of the past.”
“We have seen clear evidence that inflation is moving toward the Fed’s target, or moving strongly toward the Fed’s target, without any significant decline in the real economy,” Hatzius said. “We think the real economy will continue to perform reasonably solid with some fluctuations.”
He said continued strong real disposable household income growth will further boost the economy in the coming months.
Michelle Meyer, chief economist at Mastercard US, said at the NYU forum that consumers are “taking back some of their power.” Still, “consumers are now becoming more conscious of how they’re spending and engaging in the economy,” Mayer said, because consumers don’t have the kind of excess savings they’ve seen since the generous government stimulus. Made during the pandemic.
“We are entering a period where consumers are returning to an environment where they are more dependent on pathways to the labor market than on the flow of income generation,” Mayer said.
Still, key events impacting US consumers over the next few months will force the Fed to think carefully about its upcoming interest rate decisions and whether another hike is in the cards.
Most pressing is the shutdown of the federal government – Congress has only two weeks to reach an agreement on funding the government by September 30, and if it doesn’t, there will be a shutdown. As Politico recently reported, a shutdown would prevent the Bureau of Labor Statistics from publishing inflation and unemployment data, leaving the Fed without the information it needs to determine economic progress.
Additionally, student-loan payments are resuming on October 1 after being paused for more than three years, and Hatzius said Goldman Sachs estimates the resumption will reduce consumer spending by 0.2%. Goldman Sachs predicted that these events could stifle economic growth – and complicate the Fed’s work in the coming months.
Although the chances of a soft landing may be even higher after Wednesday’s decision, the Fed needs to expect a very hot economy and prices to remain relatively calm over the next few months.
Source: www.businessinsider.com
