The Federal Reserve has taken a different approach when it comes to providing guidance on monetary policy. They are now acknowledging that the state of the U.S. economy is uncertain, and the path forward is not set in stone.
Fed Chairman Jerome Powell stated that at the September meeting, they may once again raise funds if the data supports it. However, he also mentioned that they might choose to maintain the current rates. In other words, anything is possible.
Despite inflation being significantly lower than its peak level a year ago, Powell emphasized that the Fed could still raise interest rates further this year. He attributed much of the progress made in curbing inflation to pandemic-specific factors. Powell also acknowledged the strength in consumer demand and rising consumer confidence, highlighting that the central bank will closely monitor these developments. He made it clear that their job is far from finished.
Powell’s comments can be seen as a warning to investors who had anticipated an end to the central bank’s tightening cycle. Many had even expected rate cuts this year. However, initial stock market activity suggests that investors are disregarding Powell’s cautionary tone. The Dow Jones Industrial Average has continued to rise for 13 consecutive days.
While some may think Powell’s remarks are merely posturing to prevent premature loosening of financial conditions, economic data supports his cautious approach. It would be wise for investors to acknowledge the possibility of tighter policy when the Fed reconvenes on September 19-20.
Consumer Sentiment Reaches New High, Economy Shows Signs of Strength
Consumer Confidence and Wage Gains Drive Spending
Consumer sentiment is at an all-time high, as indicated by the Conference Board’s Consumer Confidence Index reaching a two-year peak earlier this week. This surge in confidence, coupled with wage gains surpassing inflation rates, may contribute to continued consumer spending and increased demand. While this is a positive sign for a healthy economy, it might necessitate a more restrictive monetary policy to curb price growth.
Housing Market Shows Recovery
The housing market, which is particularly sensitive to interest rates, seems to have hit rock bottom and is now experiencing a resurgence. Previously, the market had borne the impact of rate hikes, but Federal Reserve Chair Jerome Powell acknowledged on Wednesday that activity in this sector had “picked up somewhat.” Continued strength in the housing market could signal a need for further policy tightening.
Inflation Fight Intensifies
The Federal Reserve’s battle against inflation is becoming increasingly challenging, particularly in the non-housing core services sector. This is the area where Powell desires to see price growth slow down, yet it has proven elusive so far. Controlling inflation in supercore services will likely require a slowdown in the labor market and wage growth, potentially prompting further intervention from the Fed.
Powell stated on Wednesday that “labor market conditions broadly are going to be an important part of getting inflation back down,” emphasizing the need for softening labor market conditions.
Fed Awaits Economic Data
Before its next policy meeting, the Federal Reserve will have access to a wealth of economic data. This includes two jobs reports, two consumer-price-index inflation reports, comprehensive wage data for the second quarter, and an update on economic growth.
Potential for Additional Rate Hikes
Although not ruled out, it remains possible that the central bank will implement another rate hike. As the saying goes: “It ain’t over until it’s over.”
