Fed to Stand Down
The Federal Reserve will convene a two-day policy meeting Sep 19 - 20 and while headline inflation has accelerated over the summer, officials are unlikely to raise interest rates from the current 22-year high of a range of 5.25 to 5.5 percent. The reason is that while energy prices have increased (crude oil has jumped from $70 in late June to nearly $90 dollars a barrel) due to Saudi Arabian production cuts, the inflation trend is the Fed’s friend.
The Consumer Price Index (CPI) for August showed evidence of the impact of energy: the headline CPI rose 0.6 percent in August on a seasonally adjusted basis, which means that the annual trend has moved in the wrong direction: in June, inflation ran at a 3 percent annualized pace, the low of the current cycle. Then as energy prices increased, so too did the annual measure: in July it edged up to 3.2 percent and in August, it increased to 3.7 percent. The government noted that “The index for gasoline was the largest contributor to the monthly all items increase, accounting for over half of the increase.”
Excluding food and energy, the core rate of inflation was up 4.3 percent, an improvement from July’s 4.7 percent. Despite the improvement, the core level remains elevated due to the shelter index, which rose for the 40th consecutive month and has increased 7.3 percent over the last year, accounting for over 70 percent of the total increase in the core rate.
Before you jump to conclusions, a deeper dive into the current state of the economy explains why the Fed can stand down on any action for the September meeting. Although a rise in energy prices hurts consumers, Andrew Hunter of Capital Economics says that the oil surge “is unlikely to concern the Fed given the limited evidence of it feeding through to core prices.”
The elevated rate of the shelter index continues to aggravate economists because of its long lag. But even with shelter, core prices are rising by 2.4 percent in the three-month annualized terms. And other, geekier measures of prices, like the New York Fed’s Multivariate Core Trend (MCT) inflation rate has shown improvement, despite the persistence of housing’s outsized impact.
Perhaps the biggest reason that the Fed is not likely to act is that the labor market is moderating. Economists say that the combination of a deceleration of job growth, along with voluntary job quits returning to pre-pandemic levels, means that wage growth should start to ease.
WHY IS IT GOOD NEWS THAT WAGES ARE SLOWING DOWN?
As employees earn more, they are able to spend money more readily, which can keep prices high. Conversely, as workers’ pay moderates, prices should weaken. The key to worker satisfaction is for wages to rise by enough to outstrip price increases, which is why the government looks to a metric called “real median household income,” which is the inflation-adjusted amount of money the median household earns annually. According to a recently released Census Bureau annual scorecard, real median household income was $74,580 in 2022, a decrease of 2.3% from the 2021 estimate of $76,330. But it appears that 2023 could be the year that inflation slows down more than wage growth, in which case, Fed officials may not think that they need to raise interest rates further.
Chair Powell will undoubtedly tell us that the future course of Fed action will be data dependent and that the committee will proceed carefully, but 19 months after the Fed started hiking rates, it seems like this campaign is drawing to a close.