NAFCU Economist Seeks Rate Clues From Fed

The Federal Open Market Committee might consider lowering rates if economic news is bad enough over the next five weeks, a NAFCU economist said Monday.

The trick will be figuring out how much of bad is bad enough to sway committee members when they next meet Sept. 19-20.

NAFCU Economist Noah Yosif said he will be looking for hints in the minutes from the FOMC’s last meeting, held July 25-26, which the Fed plans to release Wednesday. At that meeting the FOMC raised the target for the Federal Funds Rate to 5.25% to 5.50%. It had raised rates from near zero in March 2022 to a 5.00% to 5.25% range in May, then paused in June.

“The economy has definitely shown more resilience than expected in the face of higher inflation as well as historic tightening” of credit, Yosif said.

The economy has drawn strength from savings built up by people during the COVID-19 pandemic, large numbers of job openings and rising average wages. But Yosif said recent data is showing the “adrenaline is staring to wear off.” The signs included:

• Non-farm job gains that are becoming smaller;
• Wage growth that is becoming “tepid”;
• Consumers burning through savings at a rate that will leave their reserves depleted by the fourth quarter of this year or next year’s first quarter;
• Credit card spending that is slowing; and
• Consumers who were “cooling” their spending on goods in July based on last week’s Consumer Price Index report.

“The Fed is really going to be attuned to the pace of the slowing,” Yosif said.

If the economy is cooling too quickly, the Fed might consider lowering rates.

If the economy isn’t cooling fast enough, it might start considering how much more to raise rates to drag inflation down to its 2% goal.

“Core inflation, which is what the Fed has really been focused on, is at 4.7%” — far higher than the Fed’s 2% goal. However, Yosif said, the biggest factor is housing, where prices measured for CPI lag current rates. “We’re only beginning to see deterioration in rents” in the CPI reports, he said.

Before the next meeting the Fed will have one more month of data on jobs, inflation and home sales. And the Census Bureau will have two more months of data on retail sales. Its “Advance Monthly Sales for Retail and Food Services” for July will be released 8:30 a.m. Tuesday. The report for August is to be released Sept. 14.