Strong consumer spending could keep authorities alert.
While the Fed is dealing with the possibility that higher market-based interest rates will have an impact on the economy, they are also facing another potential challenge: Economic data has remained surprisingly strong in recent months.
On one level this is good news. Consumers are buying and companies are hiring fast despite high interest rates, and this resilience comes at a time when inflation has largely moderated. The Fed’s preferred inflation gauge has dropped to 3.4 percent from 7.1 percent at its peak in the summer of 2022.
But if consumer spending remains so strong that companies feel they can raise prices without scaring away customers, that could make it difficult to get inflation back to 2 percent.
That’s why Fed policymakers are keeping a close eye on the continued tightening — and trying to determine whether it suggests further interest rate hikes are needed.
Timing is a big question.
Officials may decide they need more time to look at economic trends.
Holding off on rate hikes in November and possibly beyond could give officials a chance to see if growth and consumer spending are slowing the way companies are warning.
Also, keeping rates on hold would give authorities more time to see how geopolitical risks evolve. A war between Israel and Hamas could affect the economy in unexpected ways. If this turns into a regional war, it could shake consumer confidence. But broader conflict could also send oil prices rising, leading to inflation.
At the same time, officials would not want to completely rule out future action at a time when market rates may fall, risks may remain subdued and growth may remain strong.
“Maintaining optionality makes a lot of sense in the current context,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist.
Wall Street is divided on what happens next. Investors see a one in four chance of a rate change at the Fed’s final 2023 meeting, which takes place On 13 December. They see a slightly higher – but far from guaranteed – chance of progressing as early as 2024.
“Nobody is feeling a high level of confidence about the economic outlook right now,” Ms Urusei said.