Wall Street economists are increasingly leaning towards a pause in interest-rate hikes by the Federal Reserve in its September meeting. Various factors contribute to this anticipation, including surprisingly mild inflation reports, signs of moderate consumer spending, diminished wage pressures, and the upcoming resumption of student-loan payments. The markets currently predict a one in five chance of a hike in September. Though Federal Reserve Chair Jerome Powell has not ruled out the possibility of another interest-rate increase, the economic signs seem to be pointing towards a pause.
Core inflation, excluding food and energy, appears to be decreasing. This can be seen in sectors such as used car prices, which decreased in the first half of July, and apartment rent prices, which have edged lower since August 2022. Evidence of softening can also be found in the Fed's senior loan officer survey, indicating continued credit tightening. Economists also expect incoming data to reveal further easing in the labor market. These factors, along with the most recent inflation rate dropping to a two-year low of 3%, suggest a less urgent need to raise rates in the immediate future.
The Fed's aggressive tightening campaign since early last year has been aimed at curbing inflation, which hit a 40-year high in 2022. Policymakers paused the rate hikes in June to assess the impact of previous moves but signaled that two more increases might be appropriate by year's end. With an expected reduction in the 2023 estimate for core inflation to 3.6% or 3.7% from 3.9%, the justification for an immediate hike becomes challenging. The recent slowest advance in employment cost index since 2021 also aligns with Powell's view that the economy can slow to a soft landing.
However, there remain threats to the growth outlook, including the upcoming resumption of student-loan payments, which could negatively affect consumer spending, and the potential for a government shutdown due to a congressional stalemate. Even if a September pause occurs, Powell and the Federal Open Market Committee (FOMC) may keep their options open for the November and December meetings. They remain wary of declaring premature victory on inflation, especially since inflation surprised to the upside in 2021 and 2022, and the process of slowing inflation may still be bumpy.
This article was originally published on Quiver Quantitative