On 1 November, the U.S. Federal Reserve announced it will continue to hold its key interest rates steady at 5.25 percent on deposits and 5.5 percent on loans. The Fed has not changed the rates since July.
Fed chair Jerome Powell hinted the central bank might be done raising rates but left open the possibility of another rate bump later if inflation remains stubborn. “We are not confident yet that we have achieved such a stance,” he said.
Consumer price inflation in the U.S. was clocked at 3.7 percent in September, down from a peak of 10.1 percent a year earlier.
The Fed’s 18-month campaign of raising rates has worked its way through the economy and is slowing additional price increases, achieving the same effect as an additional Fed rate hike, economists say.
Fed officials believe that their previous rate hikes will continue to bring inflation down to, or at least close to, their 2-percent annual target rate, The Wall Street Journal reported.
“Tighter financial conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation,” the Fed said in a 1 November statement.
Also, wage growth has slowed but remains quicker than before the COVID era. (See “Wage Growth Slowest in More Than Two Years” in this issue.) Supply and demand in the labor market have reached a “better balance,” Powell said, although “labor demand still exceeds the supply of workers.”
A key aim of the Fed’s rate hikes this year has been to slow hiring and the rapid increase in worker pay. If workers keep getting raises, they tend to spend more money, which can push inflation faster.
Also, consumer spending adjusted for inflation jumped unexpectedly in September and the economy has grown stubbornly in the face of the Fed’s attempt to cut it down.
“The full effects of our tightening have yet to be felt,” Powell told a 1 November press briefing. However, “given how far we’ve come, along with the uncertainties and risks we face, the [rate-setting] committee is proceeding carefully.
“Slowing down [rate hikes] is giving us a better sense of how much more we need to do, if we need to do more,” he added.
Those “full effects” are apparent across various segments of the U.S. economy.
The rates are “flattening out” the housing market, Powell acknowledged, and are slowing business fixed investment.
The Institute for Supply Management’s latest purchasing managers index (PMI) for manufacturing fell 2.7 points last month from September’s reading, registering 46.7 in October, the 12th consecutive month of decline.
Readings below 50 indicate a contraction in business activity.
Of six main U.S. manufacturing sectors, only the one encompassing foods, beverages, and tobacco products grew during the month, the institute reported.
After Powell spoke, interest-rate futures traders pared back their bets that the Fed will raise its rates again in the current cycle, indicating a belief that the campaign of rate hikes has come to an end.
Still, “they’re not declaring victory,” Diane Swonk, chief economist at KPMG, told the WSJ. “They’re hesitant to say ‘we’re done’.”
Fed economists do not foresee a recession, Powell noted, indicating they expect to see the hoped-for “soft landing” of tamed inflation with no economic downturn.
“Everyone is gratified to see that we’ve been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that’s very typical with interest rate increases,” Powell said to reporters. “The same is true of growth.”
Even so, Powell stated that the central bank thinks the jobs market and overall economic growth need to slow more to bring inflation to the 2-percent landing zone.
TREND FORECAST: We forecast that, regardless of economic conditions, the Fed will lower interest rates ahead of next November’s U.S. presidential election to keep those in power, in power. Again, the former Fed Head Janet Yellen is now playing the role as U.S. Treasury Secretary. Thus, it is clear who is in charge of America’s economy and Wall Street.