- The Federal Reserve paused its interest rate hikes on Wednesday.
- It comes after a July rate increase, when Powell said he no longer forecasts a recession.
The nation's central bank has eased off on its war on inflation — for now.
On Wednesday, the Federal Open Market Committee announced it would be pausing its interest rate hikes in September. The last time the Federal Reserve paused the rate increases was in June after it hiked rates ten consecutive times, and during July's FOMC meeting, it decided to once again raise rates by 25 basis points.
The Fed still has work to do to reach its 2% inflation target. Inflation ticked up slightly in August, with the Consumer Price Index rising 3.7% year-over-year, but the labor market has been cooling down, which is what the Fed needs to see to confirm the economy is moving in the right direction. "That rebalancing of the labor market has taken place in a very painless kind of fashion via big declines in job openings, with very little increase in the unemployment rate, and very little decrease in employment relative to the labor force," Jan Hatzius, chief economist at Goldman Sachs, recently said at an NYU forum.
Additionally, the signals that the Fed could achieve a soft landing — in which the US continues to fight inflation while avoiding a severe economic downturn — are becoming more clear. During the July press conference, Federal Reserve Chair Jerome Powell said the central bank no longer forecasts a recession for 2023, which marks a shift from the beginning of the year when economists and lawmakers were predicting pain for the economy coming out of the pandemic.
But Powell cautioned in July that further rate hikes are not off the table for the rest of the year.
"We are resolutely committed to returning inflation to our 2% goal over time," he said. "Inflation repeatedly has proved stronger than we and other forecasters have expected and at some point that may change. We have to be ready to follow the data. And given how far we've come, we can afford to be a little patient as well as resolute as we let this unfold."
Wednesday's announcement confirmed that more hikes could be coming. The Fed also released its latest projections of where the economy is headed for the next few years. Of note, 12 out of 19 of the Fed members who vote on interest rate decisions predicted one more hike in 2023.
Other major economic events could also complicate the Fed's decisions going forward. Congress has until September 30 to come to an agreement on funding the government, and if they fail to do so by that deadline, the government will shut down. That means the Bureau of Labor and Statistics will not report economic data, including the monthly jobs and inflation reports, and the Federal Reserve would not have the information it needs to make its next interest rate move.
Treasury Secretary Janet Yellen expressed some concerns with the impact of a government shutdown on the economy. She told CNBC on Monday that "there is no reason for it to occur, and we want Congress to stay focused. We've got a good, strong economy, as we just discussed, and creating a situation that could cause a loss of momentum is something we don't need as a risk at this point."
Additionally, the student-loan payment resumption on October 1 could strain consumer spending, which will likely cause the Fed to take a closer look at how the resumption is impacting economic growth. So while Wednesday's pause is a good sign for the direction the economy is headed, consumers shouldn't breathe a sigh of relief just yet.