As the Federal Reserve Bank is poised to meet at the Federal Open Market Committee (FOMC) later this month to decide whether or not to increase interest rates further, the indicators they base their decision on keep rolling in. FOMC is trying to slow the economy to reduce the inflation rate and sometimes getting bad news is good news.
The Personal Consumption Expenditures Price Index (PCE) released by the Bureau of Economic Analysis, an inflation measure that’s watched closely by the Fed, increased 3.3% from a year earlier, above the 3% pace in June. On a monthly basis, prices rose 0.2%, in line with June’s increase. The so-called core PCE inflation, which excludes volatile food and energy items, also climbed 0.2%, similar to June, for a year-over-year increase of 4.2% from 4.1% the previous month. Although it may seem like a setback as the Fed continues to aim for a 2% targeted inflation rate, it is worth noting that inflation already started to slow somewhat by July 2022. Hence, the gap in prices between that month and July 2023 was more significant. Therefore, the tick higher in annual PCE inflation was widely expected. Meanwhile, inflation-adjusted consumer spending increased 0.6% last month, marking its strongest advance since the start of the year.
In addition, the job market continues to soften compared to its white-hot pandemic recovery situation. The Bureau of Labor Statistics (BLS) reported that the US economy added 187,000 jobs in August, a figure comparable to the monthly averages seen pre-pandemic.
Although the unemployment rate also jumped unexpectedly above economists’ predictions from 3.5% to 3.8%, due in part to a jump in the labor force, which grew by more than 700,000.
“This is the highest the labor force participation rate has been since before the pandemic,” said Gus Faucher, PNC Financial Services’ chief economist, in a statement. “If sustained, this increase in the labor force could help cool off wage growth and slow inflation.”
What Is Next For The Fed?
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” said Jerome H. Powell, the Fed chair last week. The overheated job market has been an ongoing concern for Fed officials as one of the driving forces behind inflation, and one not easily curbed by rising interest rates. As pandemic-era savings dwindle and the moratorium on student loan payments expires this fall, the pace of spending will likely cool down in the coming months.
The FOMC is set to meet on September 19-20, before which the Fed will have access to the latest Consumer Price Index inflation report due out on September 13. Although experts are divided as to what the next step in the Fed’s monetary policy will look like, many are leaning toward another pause, which would maintain the key rate in a range of 5.25% to 5.5%.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
