The Federal Reserve's policy-setting meeting held in late September 2023 ended with the decision to maintain current interest rates, with a potential increase before 2024. The Fed aims for a "soft landing" that cools inflation without triggering a recession. The impact of this strategy on different segments of the population, particularly communities of color, is under scrutiny.
In a conversation with Fed Chairman Jerome Powell over the summer, civil rights advocates, including Adam Briones, CEO of California Community Builders, questioned the potential consequences of such policies. Shortly after this discussion, the Fed raised interest rates by another quarter percent.
As of September 2023, general unemployment stands at 3.4%, but Black unemployment is nearly two percentage points higher at 5.3%. This disparity has raised concerns that if rising interest rates push overall unemployment past 4%, as projected by the Fed, Black unemployment could quickly reach recession levels.
Higher interest rates also have implications for homeownership and wealth accumulation in America. Homeownership rates among white Americans sit at about 75%, while for Latinx Americans it's 50% or less and consistently below 50% for Black Americans. With home prices slightly higher than they were a year ago and mortgage rates high, homeownership becomes increasingly unattainable for millions of working-class Americans.
The Fed's preferred tool to combat inflation is to increase interest rates, which can inadvertently lead to slower wage growth and higher unemployment. This method may disproportionately affect communities of color and may not effectively bring inflation down to desired levels. Housing costs are a major driver of inflation, and high-interest rates can hinder the construction of new affordable homes due to increased borrowing costs for developers and reduced affordability for buyers.
According to InvestingPro's real-time metrics, the Fed has a market cap of 46.36M USD and a low P/E ratio of 3.13, indicating that it's trading at a low price relative to its earnings. This could suggest that the Fed is undervalued, potentially presenting an opportunity for investors. However, the Fed is also experiencing a decline in price with a 1 Year Price Total Return of -0.82% and a 3 Month Price Total Return of -10.37%.
Additionally, factors such as rising corporate profits and global commodity prices, which are beyond the Fed's control, are seen by some economists, including those within the Fed, as key drivers of inflation. These issues require different solutions than what the Fed typically employs. As per InvestingPro Tips, the Fed is a prominent player in the Banks industry, but it suffers from weak gross profit margins.
Meanwhile, the key US inflation measure used by the Federal Reserve, the annual personal consumption expenditures (PCE) price index, rose 3.5% in August 2023, driven by a 6.1% increase in energy prices from July. Despite this, core inflation, which excludes volatile food and energy costs, slowed to an annual rate of 3.9% in August 2023.
The Fed has raised interest rates 11 times since March 2022 in an attempt to bring inflation down to its long-term target of two percent. Futures traders currently assign a probability of more than 85 percent that the Fed will hold rates steady at its next decision on November 1, according to data from CME Group (NASDAQ:CME). For those interested in more insights and tips, InvestingPro offers a wealth of additional information, which can be accessed here.
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