September FOMC Meeting Notes
After pausing rate hikes in September, the Fed indicated that one more hike should be expected before year-end. The target interest rate stayed at 5.25%-5.5%, the highest in decades.
In the released minutes of September’s meeting, much of the conversation was spotted with uncertainty. The majority did agree that more tightening is the best route and that interest rates would be at the current level for longer than initially anticipated. While consumers had hoped the Fed would lower interest rates at the start of 2024, the meeting indicated the fed funds rate would sit at 5.1% for 2024, only significantly declining in 2026 to an estimated 2.9%. These estimates could change dramatically depending on the outcome of inflation rates and economic growth in the next several quarters.
Economic activity is expanding at a solid pace. In June, GDP growth was expected to increase by 1.6% for the year, but in September, that number was raised to 2.1%. Inflation is declining but still above the Fed’s target rate of 2%. Consumer spending and job growth remain strong, although job gains did decrease slightly in recent months. The increase in energy pricing and the renewal of federal student loan payments should affect purchasing power. Still, as of September, consumer spending has held steady even though consumer credit card debt has reached over $1 trillion for the first time in history.
Overall, the economy is disoriented. Inflation is up, unemployment is down, and real estate is struggling to keep its value. The Fed is taking a more balanced approach to the economic situation, moving away from the previous notion of “more is better,” hoping that inflation can continue to come down without pushing the U.S. into a hard-landing recession.
August FOMC Meeting Notes
After a .25 percentage point increase in July, the Federal Reserve is expected to pause rate hikes during the September meeting. The outcome depends on the two months of new data that will be released before the meeting. If inflation has increased or is still running much higher than the Fed’s target rate of 2%, there is a risk of another quarter-point increase. In the released minutes of July’s meeting, much of the conversation was spotted with uncertainty. While all participants agreed getting inflation down is the number one priority, there was a lack of confidence in knowing where the economy will land after the cumulative effects of the past cycle increases. That uncertainty may be evidence that the Fed will hold rates steady as they wait to see how the economy reacts to the most recent hike.
Job growth continues to stay strong, with unemployment rates decreasing to 3.5% in July. This growth is a primary contributor to inflation’s persistence. The meeting minutes noted that the Fed suspects a slowing in job growth due to July’s .25 increase and slowing consumer spending.
A topic not riddled with uncertainty was the ongoing effect of the interest rate hikes on commercial real estate. Although the Fed dismissed their original forecast of banking failures causing a mild recession, it was stated that the sharp decline in commercial real estate assets could put some financial institutions at risk. In addition, the market continues to face a widening pricing gap between buyers and sellers and narrow profit margins, causing transaction volume to fall dramatically. Sale activity is anticipated to pick back up once rates decrease.
Overall, the economy is disoriented. Inflation is up, unemployment is down, and real estate is facing various challenges. The Fed must closely monitor upcoming data to determine what is best to avoid a hard-landing recession and continue to push inflation down.