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New data confirms a slowdown in the world’s largest economy, giving the US Federal Reserve an opportunity to maintain steady interest rates. Economists suggest that the Fed may resume its historic monetary tightening campaign later this year.
The latest US jobs report, released on Friday, revealed a slight increase in the unemployment rate for August, along with the addition of 187,000 jobs. This evidence adds to the growing perception that the economy is cooling as consumers and businesses face higher borrowing costs.
This new data comes just weeks before a crucial Fed policy meeting, where Chair Jay Powell and officials will determine whether they have done enough to control historically high inflation by tightening monetary policy. The Fed is expected to refrain from raising interest rates at the September meeting, leaving the federal funds rate at 5.25-5.5%.
Gargi Chaudhuri, head of iShares investment strategy Americas at BlackRock, expresses the view that the Fed does not need to be overly aggressive anymore. Chaudhuri believes it is best to allow the current restrictive rates to continue to have their desired impact.
President Joe Biden praised the latest jobs report, stating that the US is experiencing one of the strongest periods of job creation in its history. This report reinforces the belief that inflation may decrease without significant job losses.
Data from the Bureau of Labor Statistics reveals a decrease in job openings, as well as fewer Americans quitting their jobs. Coupled with a recent inflation report showing slowed price rises despite strong consumer spending, economists and investors believe the Fed has room to wait before implementing further tightening measures, as it tries to balance the economy.
If the Fed avoids an interest rate increase in September, it will maintain the gradual pace of tightening began this summer. In June, the central bank ended 10 consecutive months of rate rises and opted for a quarter-point rate increase in July.
Blerina Uruçi, chief US economist at T Rowe Price, states that the Fed has the opportunity to lower inflation without causing significant damage to the labor market. However, Uruçi remains prepared for further tightening measures later in the year due to uncertainty surrounding future economic data.
Federal Reserve Chair Jay Powell has expressed concern over high inflation rates and the possibility of needing further tightening. Future decisions will be made carefully, considering the totality of available data.
Officials are now faced with the challenge of balancing the risks of tightening the economy too much and causing economic pain, versus allowing inflation to remain too high for extended periods. Various concerns have been raised, such as the need to further restrict money supply if robust consumer spending continues and certain sectors, like the car market, remain overheated.
Forecasters, like Marc Giannoni from Barclays and Omair Sharif from Inflation Insights, predict a final quarter-point rate increase in November due to pockets of inflation resurfacing. Sharif, in particular, points to the car market and health insurance costs as potential drivers for higher inflation.
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