Interest rates: Fed shifts from inflation-only view to inflation and systemic risk; strong Q3 to preface growth slowdown
After leaving the benchmark federal funds rate unchanged at its June meeting, then raising the rate 25 basis points to a range of 5-1/4 to 5-1/2 in July (there was no August meeting), the financial markets’ eyes are trained on the Fed’s September 19-20 meeting.
Will they or won’t they?
Perhaps more important than a direct answer to that question, Kiran Kini, CoBank senior vice president and treasurer, believes the Fed’s outlook on risk should be the primary focus.
“The Fed’s view is that we are close to an inflection point where the risks to growth and the risks to inflation are equally balanced,” said Kini. “They're not ready to declare victory on inflation; there's still work to be done. But they also understand that risk to growth and, more importantly, systemic risk to the banking system has gone up. Until now, it's been a single-minded fight against inflation. But they're going to tread very carefully from here and look to balance those two factors.”
Kini added that while the Fed is keeping its options open for September, it is more likely that they skip a rate increase at the September meeting and leave open the possibility of the next hike for the October/November meeting, continuing on an every-other-meeting cadence. The last Fed meeting of the year is scheduled for December 12-13. If the recent trend of positive data on the inflation front were to continue, it is possible that we have seen the last hike for 2023.
Meanwhile, increasingly the Fed’s concern is continued robust economic growth.
“Q3 is looking very strong; we're not seeing a slowdown yet,” Kini said. “We could end up seeing GDP growth greater than 3%, which would be the strongest quarter we've had in a long time.
“But headwinds are picking up,“ he continued. “Student loan debt began accruing again on September 1, higher interest rates are eating into consumer purchasing power, and excess consumer savings from the pandemic are nearly depleted. We expect these factors to result in a slowdown in Q4, but the prospects for an official recession are unclear at this point.”