Fed’s Tea Leaves Get Murkier
The U.S. Federal Reserve is all but certain to hold interest rates steady Wednesday, but the economy is still scorching – beating expectations in…
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The U.S. Federal Reserve is all but certain to hold interest rates steady Wednesday, but the economy is still scorching – beating expectations in September – while American consumers continue to buy up a storm, charging their credit cards as their pandemic savings run dry.
In other words, the Fed’s 18-month campaign of ladling cold water on the nation’s economic engines, in the form of raising interest rates at the fastest clip seen this century, is making a dent, but only a small one.
Economic growth remains strong, and forecasters expect wages across the U.S. to stay taut, as an aging workforce retires.
A year ago, many were bracing for a recession. Now, what happens next seems hazy, with the Fed forced to read the tea leaves anew. With the latest data showing America’s economy potentially making a soft landing, economists are largely split over whether the U.S. is headed for a recession in 2024.
The Federal Open Market Committee – the division of the Fed that sets monetary policy – is not predicting a recession at this time in the New Year. But the New York Fed is offering some insights, with its recession probability model signaling a 56.12 percent chance of a recession by next September. Meanwhile, the Fed is predicting the U.S. economy will grow a mild 1.5 percent next year, with inflation trending lower as mortgage rates hit a 23-year high.
The Fed’s policy committee this week is seen holding rates in the current range of 5.25 percent to 5.5 percent, with some investors not expecting rates to go up again this year – or even next year.
While inflation may be easing, it could still come roaring back, so don’t expect the Fed to rest easy yet. And some prognosticators are sounding dire warnings, observing that talk of “soft landings” often comes before a recession.
A key metric to watch? Holiday spending. According to early forecasts, prospective shoppers expect to spend well beyond their means during this year’s winter holidays, with 74 percent planning to charge gifts to their credit cards, although many say they plan to buy fewer gifts, according to a NerdWallet survey.
In fact, holiday spending may be on track to revert to, or even outstrip, pre-pandemic levels, according to the 2023 Deloitte Holiday Retail Survey. It projects holiday-related purchases, which include decorations, will climb by 14 percent. It says gift spending is expected to be up 9 percent, but shoppers in its survey also said they planned to purchase fewer gifts.
Maybe shoppers will take a much-needed break in 2024, but for now, determining when Americans will halt their spending spree in response to higher inflation and interest rates is anyone’s guess – including the Fed’s.