With financial markets expecting the U.S. central bank to keep interest rates on hold at the end of a two-day policy meeting on Wednesday, policymakers now have to judge whether the economy's stronger-than-anticipated performance is a last gasp of the consumer splurge that began during the COVID-19 pandemic, or evidence that monetary policy still isn't strict enough to fully return inflation to the Fed's 2% target.
But recent weeks have provided little clarity on when that might happen, with long-awaited turns lower in hiring, housing inflation, services spending and other key data points postponed by an economy that won't quit. Investors consider it a near certainty that the central bank will keep its benchmark overnight interest rate in the 5.25%-5.50% range that was set at its meeting in July, with the odds also weighted against any further increases moving forward.
Gross domestic product growth for the third quarter best exemplified the risks the Fed is trying to parse, with pandemic-era savings, combined with a low unemployment rate and ongoing healthy wage increases, allowing consumers to keep fueling strong economic growth. That countered concerns that developments like renewed student loan payments and weakened consumer confidence would cause people to pull back.
"Given the resilience of the consumer, the risk in the near-term may be for a faster drawdown," wrote Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "Much is made of so-called 'revenge spending' ... there may be more room to run," she said in a reference to the surge in spending that has occurred during the recovery from the pandemic.
What's underway, in other words, may just be a slow, grinding adjustment back to the 2% inflation target, something the Fed would not want to rush if the alternative is a large rise in joblessness and an unnecessary recession.
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