The Federal Reserve's latest economic report, released on Wednesday, indicated that U.S. economic growth was modest in recent weeks, with a slowdown in inflation across most regions, and subdued job growth. The central bank's findings are based on surveys and interviews conducted across its 12 districts through August 28.
According to the report, the majority of districts reported a general slowdown in price growth. Furthermore, nearly all districts noted that businesses have renewed their previously unfulfilled expectations of a broad slowdown in wage growth in the near term.
These findings come two weeks ahead of the Fed’s next rate-setting meeting, scheduled for September 19-20. Policymakers are widely expected to maintain their target for short-term borrowing costs steady within the current 5.25%-5.5% range. However, they also seem to be leaving room for a potential final quarter-point rate hike before the year ends.
Despite financial markets pricing about even odds that the Fed's rate-hike campaign, which started 18 months ago, is over, most Fed officials remain unconvinced. They do believe that their 5.25 percentage points of rate hikes since March 2022 are slowing the economy, capping job growth and most importantly cooling inflation, which soared to a 40-year high last year.
Evidence supporting this view includes monthly job growth averaging 150,000 jobs over the last three months - a sharp decline from the prior three months - and inflation by the Fed’s preferred measure at approximately 3.3% in July, down from 7% last summer.
Even hawkish policymakers like Fed Governor Christopher Waller have recently signaled support for a pause on rate hikes to give time to carefully assess incoming data.
However, prices continue to rise faster than the Fed’s 2% goal, employers are adding many more than the monthly 100,000 jobs needed to meet population growth, and economic output appears to be far outpacing the less-than-2% annual growth rate Fed officials say is sustainable in the long run. These factors point towards potential upward pressure on inflation.
Thus, while they assert there is no immediate pressure to raise rates, Fed officials are analyzing data including that in the latest Beige book to assess if further credit tightening may still be necessary to bring inflation firmly back to their 2% goal. The market will be keenly focused on Chairman Powell's post-meeting press conference for any indications about future interest rate levels.
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