Fed Raises Interest Rates 75 Points as Expected But Offers a Glimpse of Hope for a Slowdown
It also noted, in a statement that will likely be interpreted as suggesting it may take a pause to evaluate its interest rate hikes next month or thereafter, that it will continue to evaluate the effects of its policy.“The Fed will slow the pace of rate hikes after four supersize moves, but they’re not stopping,” said Bankrate chief financial analyst Greg McBride . “They want interest rates to be an economic headwind, but they want to be guarded about overdoing it. If only inflation will cooperate.”
The Fed is balancing its need to restore credibility on fighting inflation with a desire not to push the economy too far into a recession. But it also faces an economy that, at least as of the last quarter, still shows signs of life.The Fed confronts a conundrum in that consumers are holding up fairly well given the twin headwinds of inflation and higher interest rates . And the labor market continues to add jobs at a healthy pace, with private payroll firm ADP saying on Wednesday that a better-than-expected 239,000 jobs were added in October, most of them in the service sector.Economists at Wells Fargo said Tuesday that it estimates the amount of excess savings held by consumers following the pandemic buildup at $1.2 trillion, down from $1.7 trillion but still enough to keep the economy afloat for a while.The mixed signals on the economy – third-quarter annualized growth in gross domestic product came in at 2.6% – vexes economists, politicians and consumers alike. For some, the glass is half empty, for others half full. But the view among most economists is still for a recession in 2023.“As demand erodes, businesses that changed inventory strategy to ‘just-in-case’ from ‘just-in-time’ are left with full shelves to unwind at a loss and less need for workers that were in high demand just a few months ago,” said Beth Ann Bovino, managing director and chief economist economist , U.S. & Canada, at S&P Global Ratings. “We expect the U.S. economy to fall into a shallow recession next year.”Even the labor market may not behave as it has in prior recessions , says Erica Groshen, senior economics advisor at Cornell University and a former commissioner of the U.S. Bureau of Labor Statistics and vice president of the Federal Reserve Bank of New York.“Early 2022 job growth rates are not sustainable for much longer,” Groshen said. “ Job growth remains above the long run growth rate for the working age population in the U.S. and the unemployment rate is very low by historical standards. Thus, even without tighter monetary policy, it is likely job growth would be slowing now.”But, she added, “In the event of a recession, employers could break with the strong pre-Covid pattern of permanent layoffs during recessions of the last four decades. They may choose to retain workers via furloughs or cutting hours so as not to face the shortages they just dealt with.”
It also noted, in a statement that will likely be interpreted as suggesting it may take a pause to evaluate its interest rate hikes next month or thereafter, that it will continue to evaluate the effects of its policy.
“The Fed will slow the pace of rate hikes after four supersize moves, but they’re not stopping,” said Bankrate chief financial analyst Greg McBride. But it also faces an economy that, at least as of the last quarter, still shows signs of life.
The Fed confronts a conundrum in that consumers are holding up fairly well given the twin headwinds of inflation and higher interest rates.
“As demand erodes, businesses that changed inventory strategy to ‘just-in-case’ from ‘just-in-time’ are left with full shelves to unwind at a loss and less need for workers that were in high demand just a few months ago,” said Beth Ann Bovino, managing director and chief economist economist, U.S. & Canada, at S&P Global Ratings.
