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New data confirming the world’s largest economy is slowing has given the Federal Reserve leeway to keep interest rates stable, economists say, even as it leaves open the possibility of a resumption of a historic tightening campaign later in the year.
Friday’s U.S. jobs report – which showed the unemployment rate rose in August while a whopping 187,000 jobs were created – was the latest evidence this week that while the economy is still resilient, it is beginning to cool as consumers and Companies face higher borrowing costs.
The new data comes just three weeks before a key Fed monetary policy meeting at which Chair Jay Powell and officials will decide whether they’ve squeezed the economy enough to bring historically high inflation back under control after interest rates were raised to a 22-year high.
It is widely expected that the Fed will refrain from raising interest rates at its September meeting, leaving interest rates between 5.25 and 5.5 percent.
“The Fed no longer needs to be extremely aggressive,” said Gargi Chaudhuri, head of iShares Americas investment strategy at BlackRock. “Now is the time to simply let the restrictive tariffs continue to work as before.”
On Friday, President Joe Biden said the US was in “one of the strongest periods of job creation” in its history and hailed the latest jobs report as another sign that inflation could be falling without significant losses in the labor market.
Job openings have also fallen to their lowest level in about two years, while fewer Americans are quitting their jobs, Bureau of Labor Statistics data showed this week.
Coupled with an inflation report on Thursday that showed inflation has slowed even as consumers report buoyant spending on essential goods and services this summer, economists and investors say the Federal Reserve can afford to wait before doing more damage to the economy.
“There’s really no reason for them to tighten monetary policy any further at this point,” said Jan Hatzius, chief economist at Goldman Sachs. “It makes a lot of sense to potentially be on hold for an extended period of time.”
If the Fed refrains from raising rates in September, it would maintain the gradual pace of tightening begun this summer, when the central bank ended ten straight months of rate hikes by pausing in June and committing to a quarter-point rate hike in July decided.
“It almost feels like the Fed can have its cake and eat it too by lowering inflation without doing too much damage to the labor market,” said Blerina Uruçi, chief US economist at T Rowe Price.
While ‘favorable’ economic data this week confirmed its view that the central bank would do without a move in September, it is still primed for further tightening later this year.
“There are reasons to be cautiously optimistic, but at the same time the data has been behaving in such unusual ways that we have to recognize that there is a great deal of uncertainty about what happens next,” Uruci said.
Powell warned last week that inflation remains “too high” and that further tightening may be needed. Future decisions would be made “carefully” and would reflect the “entirety” of the data, he said at the Fed’s annual symposium in Jackson Hole, Wyoming.
Officials are now trying to balance the risk of putting too much pressure on the economy and causing excessive economic damage with the risk of inflation staying too high for too long.
One concern is whether robust consumer spending and other signs of economic resilience mean the Fed must tighten further to bring inflation back up to the central bank’s 2 percent target — a risk both Powell and Officials like Susan Collins have pointed out the Boston Fed.
That also worries Marc Giannoni, who used to work at the Fed’s regional banks in Dallas and New York and now works at Barclays. He forecasts a final rate hike of a quarter point in November.
Omair Sharif, president of forecasting group Inflation Insights, said he was concerned that pockets of inflation could reemerge in the fourth quarter of the year if sectors like auto remain too hot. Wholesale vehicle prices have already started to rise again, he noted. He also keeps a close eye on health insurance costs.
“We will simply move in the wrong direction, from being close to target to around 3.5 percent in the core consumer price index,” he said of his year-end forecast. In July it was 4.7 percent. Sharif therefore only announced a further interest rate hike in December.
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