The latest data showed US consumers spent at a strong clip last month, as the economy continued to slow even after more than a year and a half of Federal Reserve interest rate hikes.
The Fed’s policy steps are aimed at slowing demand to reduce inflation. Price growth is slowing: Friday’s personal consumption expenditure report also showed that overall inflation remained steady at 3.4 percent in September.
That was in line with economists’ expectations, and down from a peak of 7.1 percent in the summer of 2022. And after stripping out volatile food and fuel to get a clearer sense of the underlying inflation trend, a closely watched core inflation measure eased slightly on an annual basis.
Still, Fed officials aim for 2 percent inflation, so the current pace is still much faster than their target.
The question now facing policymakers is whether inflation can slow the rest of the way, at a time when consumer spending remains so strong. Businesses may find that they can charge more if buyers are willing to open their wallets. Friday’s report showed consumer spending rose 0.7 percent from the previous month and 0.4 percent after adjusting for inflation. Both numbers were above economist forecasts.
The strong spending data probably isn’t enough to prompt Fed officials to react immediately: Policymakers are widely expected to leave interest rates unchanged at next week’s meeting, which ends on Nov. 1. But if it continues, such solid momentum could keep them wary.
“You’re seeing that inflation is still generally moving in the right direction, so I think they’re willing to look beyond that,” said Carl Riccadona, chief U.S. economist at BNP Paribas. “If this continues for several quarters, I think maybe it will start to weaken a little bit: If you have consistently above-trend growth, you have to start worrying about what the inflationary consequences are.” Will be.”
Fed policymakers recently raised interest rates from near zero to 5.25 percent by March 2022, and several officials have suggested that interest rates are likely to be at or near their peak.
But policymakers have been careful to avoid completely ruling out the possibility of another rate hike, given the stability of the economy.
A report yesterday showed that the economy grew at an annual rate of 4.9 percent in the third quarter after adjusting for inflation. This was a rapid pace of expansion, and faster than forecasters had expected.
“We continue to focus on recent data showing the resilience of economic growth and labor demand,” Fed Chairman Jerome H. Powell said in a recent speech. “Monetary policy will be further tightened.”
Inflation has slowed down in the last year due to several reasons. Supply chains became disrupted during the pandemic, creating shortages that pushed up the prices of goods — but they have since fallen. Gas and food prices had risen after Russia’s invasion of Ukraine, but have fallen as a factor in inflation this year.
Some of those changes have nothing to do with monetary policy. But in other areas, the Fed’s higher interest rates could help. For example, expensive mortgages appear to have taken at least some of the profits out of the housing market. This could help curb rent increases, a big factor in key measures of inflation.
Dealing with inflation in other ways may prove to be a big challenge. Almost all of the remaining inflation is coming from service industries, including things like health care, housing costs and haircuts. Such price increases tend to persist more strongly.
For now, officials are waiting to see whether their substantial rate increases so far will continue to help cool the economy.
There are many reasons to think that growth may soon slow down.
“Despite quarter-to-quarter fluctuations in economic data, the Fed feels it has an accommodative policy in place,” said BNP’s Mr. Riccadona. “It’s really a matter of waiting for the drug to take full effect.”
Additionally, the recent rise in long-term interest rates could weigh on the economy. While the Fed sets short-term rates directly, those market-based borrowing costs can take time to adjust — and they matter a lot. The surge in long-term rates has made it more expensive to get a mortgage or borrow money to fund their operations.
Plus, consumers have slightly less money to spend: After adjusting for inflation, disposable income declined 0.1 percent in September. Friday’s report revealed, And global instability – including a war between Israel and Hamas – could increase uncertainty and economic risks.
