By Howard Schneider
WASHINGTON (Reuters) – Federal Reserve officials meet on Tuesday for their next policy meeting after an unusually long eight-week respite since their last meeting, reviewing a larger-than-usual amount of US economic data.
The comma was less obvious than modest. Inflation has shown no sign of abating. Rather than gaining insight into the endgame, US central bank officials acknowledged that the battle could be long and painful.
For now, it looks like the Fed will raise interest rates by three-quarters of a percentage point next week, although the release of higher-than-expected consumer price data on Tuesday provided a gauge of uncertainty for these expectations – to the upside.
What comes after the next meeting is at hand. The new economic forecasts that will be released along with the September 21 policy statement will give an indication of what policy makers think will happen, but their track record of late has not been as good.
First, the bad news
Fed officials were shocked in June when inflation rose faster than expected, and then delayed in July when the pace of annual rate increases slowed.
But any sense that the worst ended in August. Although lower gasoline prices helped dampen general inflation – a bit – the decline was modest, and beneath it, a variety of “core” prices rose unexpectedly. The Consumer Price Index rose at an annualized pace of 8.3% last month. Excluding volatile food and energy components, 6.3% were recorded.
Finally, inflation continues to move sideways despite the fastest set of rate hikes by the Fed since the early 1980s. For inflation to fall from its current annual pace to something close to the Fed’s 2% target, the average monthly increase would need to be around 0.2%, about a third of its average since the beginning of 2021.
Most realistically, the mechanics don’t work as expected, or at least not as fast. Officials believed that commodity prices would fall as supply chains improved, offsetting the expected rise in service costs as people began to travel, go out to eat, and offset the kinds of limited spending during the COVID-19 pandemic.
Services swell brisk. However, commodity prices have not hit the cliff yet, in fact, rose in August.
And more pain may be on the way. In recent weeks, Federal Reserve officials have indicated that rising rents are likely to keep inflation high for the time being, and continued wage growth — especially price-related in the labor-intensive service sector — as a concern as well.
Hope in the future?
Not all inflation news was for the worse. Closely watched gauges of household expectations, which the Fed feels can influence future price behavior and are a sign of whether its promise to control inflation has credibility, have shifted in the central bank’s direction.
The sudden rise in the June inflation survey helped push the Federal Reserve to raise interest rates in larger increases of three-quarters of a percentage point.
Producer prices fell for the second month in a row, and although that was driven by lower gas and energy costs, it’s a trend that some economists feel will continue and ultimately fuel what consumers are paying. The index includes, for example, metrics that reflect business margins, or profit, for things like cars that are eventually expected to fall sharply.
Now for the good
The new data released in the two full months since the Federal Reserve’s July meeting hasn’t been bad.
In late August, revisions to GDP and GDP estimates for the first half of the year eased concerns about a growing recession. GDP is still shrinking, but by a smaller percentage than initially estimated; The measure of income, another way to track the speed of the economy, has continued to grow. When the two averages are calculated together, the US economy managed to post small gains from January through July.
More clearly for the Federal Reserve, the labor market is not only staying strong, but it is beginning to behave in the ways that policymakers had hoped.
The two monthly employment reports released since the Fed’s last meeting showed that the economy added 526,000 jobs in July and 315,000 in August, an ongoing strong showing for a labor market that the Fed hopes to outpace high interest rates without the shock of major layoffs.
There are many skeptics, and the book is still open. For the Fed’s hoped “soft landing” of low inflation combined with a healthy job market and a growing economy, upcoming data on job openings should appear to decline.
The unemployment rate rose somewhat in August, but the Fed is hopeful that the valve for real liberation of wage pressures and the “tightness” of the labor market will come from employers who back away from hiring plans as the economy cools rather than paying a premium to workers who feel they need to. Meet demand and profits.
August data showed some potentially good trends for the Fed.
The increase in the unemployment rate, for example, from 3.5% to 3.7%, was driven by increased participation in the labor force – more people not just in jobs, but chose to look for them.
Perhaps most importantly, the workforce gains have been the result of strong inflows into the labor market, and not just, as is sometimes the case, a decrease in the number of people leaving – an important distinction.
The number of people outside the workforce who switched directly to a job in August, 4.9 million, was the largest since the pandemic began. Similarly, the number of unemployed people who gave up looking for work and left the labor force was the lowest, at 1.3 million.
Both numbers indicate the type of increased labor pool and increased ‘attachment’ to the workforce that can help relieve wage pressures and also help reduce the vacancy rate over time.