The Federal Reserve, in its latest decision, chose to maintain the target range for the federal funds rate at 5.25% – 5.50%. However, the central bank also issued a warning that rate hikes are still very much on the table, with the possibility of an increase as early as November 1, 2023. This decision marks the continuation of a trend that has persisted for over a year, with the Fed opting to leave the door open for further rate hikes.
The Federal Open Market Committee (FOMC) unanimously voted to maintain the current target range for the federal funds rate in its latest announcement. This decision reflects the Fed’s dual mandate: to achieve maximum employment and keep inflation around 2% over the longer term. The Fed is walking a fine line, balancing the need to control rising inflation while not derailing economic growth.
One of the primary drivers of the Fed’s recent actions is the resurgence of inflation. Over the past months, the Consumer Price Index (CPI) has steadily risen, reaching 3.7% in August. Higher energy prices have played a significant role in this inflationary pressure. While some economists focus on core and super-core inflation metrics, which exclude volatile categories like food and energy, everyday consumers feel the impact of rising prices in these essential areas.
The Federal Reserve now faces a challenging dilemma. On one hand, they must grapple with persistent inflation that threatens the purchasing power of consumers. On the other hand, signs of an economic slowdown are emerging, including slower job creation, trouble in the commercial real estate sector, declining industrial output, and credit contraction. These factors make the path forward for monetary policy less clear-cut.
Federal Reserve Chairman Jay Powell’s press conference following the announcement shed light on the central bank’s thinking. Powell emphasized the need for flexibility in the face of uncertainty. He acknowledged that real interest rates are already positive, suggesting there may not be an immediate need for further rate hikes.
However, Powell also made it clear that the Fed is not ruling out future rate increases. He noted the economy’s strong momentum and the potential need to address inflation if it continues to exceed the target.
One key indicator presented during the meeting was the “dot plot,” which reflects the economic projections of Fed governors and regional reserve bank presidents. The majority indicated that they believe one more rate hike is likely in 2023. The median fed funds rate projection for the end of 2023 stands at 5.60%, implying another rate increase.
In conclusion, the Federal Reserve’s recent decision to keep rates unchanged should not be misconstrued as a definitive pause in rate hikes. The central bank continues to grapple with the challenge of balancing inflationary pressures with the risk of an economic slowdown. While the market may hold a “soft landing” or “Goldilocks” narrative, suggesting a prolonged pause or even rate cuts, Powell’s statements and the historical pattern of “hike-skip-hike-skip” indicate that further rate hikes are likely, with November 1, 2023, emerging as a probable candidate for the next rate hike.