Fed Leaves Rates Unchanged as Officials Debate Economy’s Path

The Washington Post / Rachel Siegel

13:31 JST, November 2, 2023

A roaring economy continues to test the Federal Reserve’s fight to tame inflation, a year and a half into the central bank’s aggressive interest rate increases.

Central bankers left rates unchanged Wednesday, as was widely expected. But they have yet to fully decide whether rates – already pushed to their highest levels in 22 years – should go even higher to root out abnormally high prices, curb consumer spending and bring growth to more sustainable levels.

“That’s the question we’re asking is, ‘Should we hike more?'” Chair Jerome H. Powell said after the Fed’s two-day policy meeting.

The major stock indexes rallied on Powell’s remarks, breathing a sigh of relief that additional rate increases aren’t certain. At the close, the Dow Jones Industrial Average rose 221.71 points, or 0.67 percent. The Nasdaq climbed 1.64 percent, and the S&P 500 index closed up 1.05 percent.

Faced with soaring inflation as economic growth boomeranged back from the coronavirus pandemic, the central bank sprinted to raise interest rates starting in March 2022. The Fed’s benchmark interest rate now falls between 5.25 and 5.5 percent, and officials have not ruled out an additional increase at their next meeting in December or even into 2024. The growing message instead is that rather than pushing up rates, Fed leaders will hold them at elevated levels for longer than they previously expected.

Those decisions will depend on what happens with inflation, economic activity and financial conditions. Bond yields, for example, have shot up in recent weeks, and some officials suggest that could effectively do the job of one more rate increase if sustained long enough. Fed leaders have had to contend with a barrage of other potential threats, including the Israel-Gaza war, the autoworkers strike and the prospect of another government shutdown.

But the overall picture seems unlikely to change: an economy that time and again has proved resilient despite high interest rates and inflation, wars abroad, and a smattering of other threats to the U.S. economy.

Jason Furman, a Harvard economist and former adviser to President Barack Obama, said the Fed is seeking a balance between patience and declaring “mission accomplished” too soon.

“I think they’ve made enough progress on inflation that they can afford to be patient,” Furman said. “I don’t think there’s a whole lot that would put a rate hike on the table in December. But if by the first half of next year, if inflation is running at a 3 or 3.5 percent pace and we’re still adding jobs, I think they’ll have to come back and do more.” (Typically, inflation runs at 2 percent annually.)

Powell said the Fed is not forecasting a recession, adding that “it would be hard to see how you would do that if you look at the activity we’ve seen recently.” He said the fact that the economy has not collapsed under the weight of high interest rates was a “historically unusual and very welcome result.”

Yet Powell stood by his opinion that some pain would be necessary to get inflation back to normal levels. What that looks like, though, no one knows.

“It is still likely to be true, not a certainty, but likely that we will need to see some slower growth and some softening in the labor market – in labor market conditions – to fully restore price stability,” Powell said.

Normally, steep rates would zap the economy or cause a recession, as people pull back on spending and businesses shed workers. But the 2023 economy is showing the opposite, buoyed by a tight labor market and the spending of consumers nationwide.

So far, robust spending, especially among wealthy Americans, has kept the economy humming far beyond expectations. Undeterred by high inflation, many households are buying concert tickets, fancy vacations and new vehicles. High costs for the basics – groceries, gas, rent – are still falling hard on lower-income families with less budget flexibility. But data released last week showed a fifth consecutive quarter of growth, with the economy expanding at an annualized rate of 4.9 percent from July to September, the strongest pace since 2021.

The job market hasn’t cratered, either. Powell pointed to signs of slowing such as fewer job openings and wages that are increasing at a more moderate pace. But the unemployment rate is still at a hot 3.8 percent, and employers have added jobs for 33 months straight.

Part of that surprise stems from the fact that households and businesses just aren’t responding to higher interest rates in typical ways. The housing market, for example, is supposed to be especially sensitive to interest rates, as high borrowing costs kick mortgage rates way up. The average for a 30-year fixed-rate mortgage is now 7.79 percent, up more than 1 percentage point in 2023, according to Freddie Mac.

But a downturn in the housing market didn’t last long, and home prices are again on the upswing. Prices rose 2.6 percent in August compared with the year before, according to data released Tuesday by the closely watched S&P CoreLogic Case-Shiller Home Price. Thirteen of the country’s 20 major metro markets also reported price increases in August compared with July.

“It really is a story of much stronger demand,” Powell said at the Economic Club on Oct. 19. “There may be some ways the economy is less affected by interest rates. It’s hard to know precisely.”