A RATE HIKE IS VIRTUALLY CERTAIN tomorrow, but the case is growing for no further increases this year. Officials at this week’s FOMC meeting will have to acknowledge the following five headwinds:
Headwind 1 — A slowing in real disposable income, thanks to the resumption of interest payments this fall on student loans. And savings from pandemic aid have been virtually exhausted.
Headwind 2 — Militant unions, not just the Teamsters but also including auto workers, airline employees and hotel workers, are raising the threat of of a potential disruption in the supply chain. This headwind alone may give the Fed a reason to pause this fall.
Headwind 3 — A threat of fiscal restraint as Republicans seek to cut spending by more than agreed upon in the debt ceiling deal earlier this summer. House debate over the budget begins in the next few days, with the threat of a government shutdown looming on Oct. 1 — hardly a positive for consumer confidence.
Headwind 4 — The relentless, unprecedented heat wave that is now spreading to the Midwest and the East, which will keep many people indoors and drive utility bills higher, another drag on disposable income.
Headwind 5 — The Fed itself, at risk of overdoing the restraint even though inflation has dropped significantly. The Fed will stick with its 2% CPI target, but does it have to get there right away? Still more rate hikes after this week’s move would intensify criticism from Congress that the Fed is risking a recession by raising rates after inflation has peaked.
BOTTOM LINE: The economy continues to grow and inflation has not been totally subdued, so it’s extremely unlikely that the Fed will consider rate cuts until 2024. But the argument for more rate hikes is fading as the headwinds give the Fed a reason to pause after tomorrow.
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