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The steady stream of encouraging news all but guarantees that the Federal Reserve will leave rates unchanged when officials gather for their final policy meeting of the year on Tuesday and Wednesday. Since they started hoisting rates in the spring of 2022 as inflation spiked, central bankers were often in catch-up mode, scrambling to get borrowing costs high enough to meaningfully slow the economy. But officials have charted a different path since late summer: pausing rate hikes to see how the economy responds to everything they have done so far.
The big questions now are whether the Fed has indeed reached the end of its aggressive rate-hike campaign — and whether the central bank will cut rates in 2024. The markets are eager for any hints, which could come during Federal Reserve Chair Jerome H. Powell’s news conference on Wednesday afternoon.
“I can’t imagine the Fed seeing anything in the [inflation] release that would change my expectation that they stand pat,” said Wendy Edelberg, director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution.
Before announcing rate cuts, Edelberg said, central bankers will have to explain how they feel comfortable lowering borrowing costs, especially if inflation hasn’t quite hit the Fed’s 2 percent target. Instead of offering a clear timeline this week, Powell will probably caution that “things are looking good, but we’re waiting to see irrefutable evidence that the momentum is still with us,” Edelberg said.
The overall inflation picture will become a bit clearer Tuesday morning, when the Bureau of Labor Statistics releases fresh inflation data from November. Economists estimate that prices rose roughly 3 percent that month over the year before, and about 0.1 percent compared to October. Much of the rise is likely to come from rent, which has started cooling but still makes up a large part of the overall inflation snapshot.
There’s been considerable progress since the consumer price index peaked in June 2022 at 9.1 percent. Gas and energy prices — which surged after Russia’s invasion of Ukraine — have cooled. Supply chains have cleared their backlogs, taming prices for everything from car parts to stationary bikes. Plus, a blockbuster year for the labor market plugged worker shortages and helped tame wage growth to more normal levels.
But the Fed is still many steps short of declaring victory. Its leaders consistently say any number of threats, including wars abroad or China’s economic slowdown, could send inflation in the United States back up. Officials warn that failing to finish the job could jeopardize the economy even more down the line.
Plus, no one is entirely sure what it will take to snuff out the sources of inflation that don’t come from gas prices or bungled supply chains. Officials expect some relief on the housing front, with roughly 1 million multifamily rental units slated to come online later this year and next. Higher rates are usually expected to lower housing prices, too, by tamping down demand for home purchases as mortgages get more expensive.
But in yet another twist of the post-pandemic recovery, large parts of the economy aren’t responding to high interest rates as Econ 101 would suggest. The Fed’s benchmark interest rate, known as the federal funds rate, stands between 5.25 and 5.5 percent — the highest level in 22 years.
Economists widely expected the steep run-up in rates would cause a recession. Instead, key pillars of the economy are roaring.
Crucially, consumer spending continues to propel the economy forward. Employers are still hiring, with the unemployment rate at a hot 3.7 percent. And in recent months, Powell has pointed to groups that just aren’t that hampered by high borrowing costs, like homeowners who bought homes when mortgage rates were still low, or businesses that termed out their debt and now aren’t feeling tighter financial conditions.
“It really is a story of much stronger demand,” Powell said in October. “There may be some ways the economy is less affected by interest rates. It’s hard to know precisely.”
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