Inflation 2023: Fed Says It’s Still Too High — What This Means Heading Into 2024
Federal Reserve Chair Jerome Powell reiterated that inflation is still “too high” and that the path to bringing it down will be “bumpy,” in an Oct. 19 speech at the Economic Club of New York. He added that the Fed remains “resolute” in its commitment to returning inflation to 2%. His remarks come a few days ahead of the next Federal Open Market Committee (FOMC) meeting, on Oct. 31.
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“Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said in his prepared remarks. We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters. While the path is likely to be bumpy and take some time, my colleagues and I are united in our commitment to bringing inflation down sustainably to 2%.”
While inflation has been cooling down — at 3.7% according to the Consumer Price Index (CPI), released Wednesday, Oct. 12 — which is a notable decrease from the 8.2% the same month last year- it is still a far cry from the Fed’s 2% target.
Following its most recent two-day Federal Open Market Committee (FOMC) meeting on Sept. 19-20, the Fed paused its interest rate hikes for the second time this year, following 11 increases since March 22. The decision, while welcome news for Americans, was largely seen as a “wait and assess” move.
What does it mean for the Fed’s next moves?
In terms of what Powell’s Oct. 19 speech means for where the Fed is headed next, some experts noted that he clearly telegraphed there will be no hike in November but left open the possibility for December or a future meeting.
“Reading the tea leaves suggests one more hike, at most,” said Jeffrey Rosenkranz, portfolio manager at Shelton Capital Management. “Given that many observers believe the Fed does not like to take action in a presidential election year, December would seem more likely.”
Yet, Rosenkranz added that given the sharp increase in longer-term rates recently, and the significant tightening effect this will have on financial conditions, there won’t be enough evidence to warrant another increase by December.
When can we expect inflation to be where the Fed wants it to be?
In his Oct. 19 speech, Powell noted that “additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
In turn, some experts said that to achieve this, inflation must decrease in a sustained, constant way and remain low, “not just head-faking for a few months and then flaring up again.”
According to Rosenkranz, housing-related inflation should moderate over the coming months as the lag in data sampling and collection catches up to reality, which will definitely help, but until the labor market starts softening materially, hitting the 2% target sustainably won’t be possible.
“We don’t think this will happen until sometime in the middle of next year,” he said.
William Luther, director of the American Institute for Economic Research’s Sound Money Project noted that the 30-Day Fed Funds futures market is a little more optimistic in terms of inflation, and in turn, the Fed’s moves.
“It is currently pricing in a 98.2% chance that the Fed will leave its target unchanged in November, and only a 24.5% chance that the Fed will raise its target in December,” said Luther.
“Inflation has declined a lot over the last year and interest rates have been sufficiently restrictive,” he said, adding that further rate hikes would risk an unnecessary recession.
According to him, inflation is already near target on a monthly basis, with above-target annual rates largely reflecting price hikes that took place six to 12 months ago.
“If prices continue to grow along their current trajectory, the annual inflation rate will be back to 2% by the third quarter of 2024,” he added.
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What does it mean for Americans’ wallets?
According to the Fed minutes released earlier this month, a majority of Fed officials judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate.
As Rosenkranz noted, rates are going to remain high for much of 2024, and the Fed will keep rates too high for too long and overcorrect.
“What this means for consumers is that anything purchased with financing — ie. a loan, a lease, etc. — will become more expensive and stay that way for the foreseeable future,” he said. “While many consumers have not yet needed to take on a mortgage or buy a car or large appliance, if rates remain high, they eventually will have to capitulate, which will cause them to cut back in other areas.”
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