October Outlook: Fed Unlikely To Cut Rates As Inflation Hangs On

For the past 18 months, the Federal Reserve has been doing its best to tackle inflation and trip up an overstimulated U.S. economy. But the economy just keeps chugging along. Despite the central bank’s most aggressive tightening in decades, the jobless rate remains below 4%, stocks and home prices are flirting with all-time highs and inflation is ticking up again.


The unexpected resilience of the American economy is behind the Fed’s new stance of keeping rates elevated for longer than expected. While the central bank announced no change to rates at its Sept. 20 meeting, the Fed also has signaled that it doesn’t expect to begin cutting rates until well into 2024.


“We have covered a lot of ground, and the full effects of our tightening have yet to be felt,” Federal Reserve Chairman Jerome Powell said in his latest press conference.


In his remarks, Powell acknowledged that monetary policy is a blunt instrument rather than a precise one – changes in Fed policy don’t always direct the economy in the way central bankers envisioned..


“We remain committed to bringing inflation back down to our 2% goal and to keeping longer-term inflation expectations well anchored,” Powell said. “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.”


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Inflation: Improving, still not tamed

The COVID pandemic, and the government’s robust response to shore up the economy with trillions of dollars in stimulus, sparked the highest inflation since the early 1980s. The Fed was caught off guard --- it had feared deflation, not inflation. But by June 2022, the U.S. inflation rate topped 9%. When the inflation problem became obvious, Powell quickly changed his tune, and from early 2022 through July 2023, the Fed pushed rates from zero to the current range of 5.25% to 5.5%.


Monthly inflation data via St. Louis Federal Reserve Bank

‘So much uncertainty’

The Fed’s aggressive response to inflation since early 2022 signals the end of an era of super-low rates in the U.S. To cite one example, residential mortgage rates have soared to their highest levels in more than two decades. Mortgage company Freddie Mac said that, as of Sept. 21, mortgage rates averaged 7.19%, near their highest point since 2001. 


Meanwhile, Powell noted many wild cards could disrupt markets. The United Auto Workers went on strike in September. Republican lawmakers in Congress were wielding a government shutdown as a bargaining chip. Many Americans will be compelled to resume making student loan payments soon. Oil prices have begun to trend up again. And the Fed’s response to inflation means borrowers are paying more for credit card debt, auto loans and home equity loans.


None of those issues alone is enough to derail the economic recovery. But many economists have begun to worry about the possibility of several shocks reverberating through the economy. It’s possible to imagine, for instance, that the auto strike could create another spike in auto prices. Oil prices are marching toward $100 a barrel, wage growth is strong and new demands for student loans could squeeze consumers already dealing with the sticker shock of sustained inflation. “There's so much uncertainty around these things,” Powell said.


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