Finance

Why the Fed’s dovish stance on interest rates is not enough to start popping the ScrgruppEn

Federal Reserve officials kept interest rates steady at their monthly policy meeting on September 20, 2023 – only the second time they have done so since they began a rate hike campaign a year and a half ago. But it’s what they hinted at rather than what they did that caught many economists’ attention: Fed officials signaled that they don’t expect rates to end 2023 higher than they predicted in June — when they last issued their forecasts.

Since the hiking cycle began, observers have worried about whether increased rates could push the US economy into a downturn. Some have even speculated that a recession has already begun. However, the economy has been more resilient than many expected, and now many economists are wondering whether the seemingly impossible soft landing – that is, a slowdown that prevents the economy from collapsing – has become a reality.

As a professor of finance, I think it’s premature to start celebrating. Inflation is still nearly double the Federal Reserve’s target of 2%, and is expected to come in at around 4% in September. What’s more, the economy continues to grow quite quickly, with consensus forecasts showing gross domestic product to rise by nearly 3% this quarter. Some early data suggests this may be a low estimate.

What’s next for interest rates?

Fed watchers are analyzing the central bank’s every word to determine whether another hike is coming this year or next, or whether the cycle is truly over. To understand that decision, it helps to consider the bigger picture.

While the US economy has certainly avoided a downturn longer than many expected, the inflation battle is far from over. In fact, it wouldn’t be the first time the economy looked like it would avoid a soft landing. For the next few months, the economy is unlikely to implode without a big spark.

However, inflation may not continue to fall as quickly in the coming year, meaning the Fed could still raise rates more than some expect. If rising oil prices continue to raise transportation costs, other goods may also become more expensive, which could mean higher interest rates for longer.

Is this really the end?

Although Federal Reserve Chairman Jerome Powell appears to be signaling that the committee is nearing the end of the hike cycle, only 10% of economists expect it to be over at this point – not that economists’ track record of forecasting rates is good either not. That’s largely because Powell has been clear that the Fed is basing its decisions on economic data, which has been strong so far and will hopefully continue in that direction.

So while everyone is watching the Fed this week, they should also keep an eye on broader economic conditions. With luck, the reported data will still be strong enough to avoid a downturn, but not so strong that inflation picks up again.

D. Brian Blank is Assistant Professor of Finance, Mississippi State University.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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