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New data confirming that the world’s largest economy is slowing has given the US Federal Reserve room to keep interest rates steady, even as it leaves open the possibility of resuming its historic monetary policy tightening campaign later in the year, economists say.
Friday’s US jobs report – which showed the unemployment rate rose in August with a healthy 187,000 jobs added – represents the latest evidence this week that the economy, while still resilient, is starting to slow as consumers and businesses face rising borrowing costs.
The new data comes just three weeks before a crucial Fed policy meeting when Fed Chairman Jay Powell and officials will decide whether they have pressured the economy enough to bring historically high inflation back under control, after raising the benchmark interest rate to the highest level in 22 years. . .
The Fed is widely expected to waive the rate increase at its September meeting, leaving the federal funds rate between 5.25-5.5 percent.
“The Fed doesn’t need to be so aggressive anymore,” said Gargi Chaudhuri, head of iShares investment strategy in the Americas at BlackRock. “It is time to allow capped rates to continue to operate as before.”
President Joe Biden said Friday that the United States is going through “one of the strongest periods of job creation” in its history and praised the latest jobs report as another sign that inflation may decline without major labor market losses.
Data from the Bureau of Labor Statistics showed this week that job openings also fell to their lowest level in nearly two years, while fewer Americans are leaving their jobs.
Combined with Thursday’s inflation report that showed price rises have slowed despite brisk consumer spending on everyday goods and services this summer, economists and investors say the U.S. central bank can wait before doing more damage to the economy.
“There is no real reason for them to tighten further at this point,” said Jan Hatzius, chief economist at Goldman Sachs. “It makes a lot of sense to keep waiting for a very long time.”
If the Fed abandons raising interest rates in September, it will maintain the gradual pace of tightening it began this summer, when the central bank ended 10 straight months of rate hikes by pausing in June and opting for a quarter-long rate hike. percentage point in July.
“It feels like the Fed is able to have its cake and eat it too, lowering inflation without causing too much damage to the labor market,” said Blerina Orochi, chief U.S. economist at T. Rowe Price.
While “benign” economic data this week reiterated its call that the central bank could ignore the September move, it remains prepared for further tightening later this year.
“There are reasons for cautious optimism, but at the same time, the data has behaved in such unusual ways that we have to realize that there is a lot of uncertainty about what will happen next,” Orochi said.
Powell warned last week that inflation was still “very high” and that further tightening may be needed. He said at the Fed’s annual symposium in Jackson Hole, Wyoming, that future decisions will be made “carefully” and reflect the “totality” of the data.
Officials are now trying to balance the risk of squeezing the economy too hard and causing unnecessary economic pain, with the risk of allowing inflation to remain too high for too long.
One concern is whether strong consumer spending and other signs of economic resilience mean the Fed will need to tighten the money supply further to bring inflation back to the central bank’s 2 percent target — a risk recently noted by both Powell and officials like Susan Collins of Federal Reserve Bank. Federal Reserve Bank of Boston.
This is also a concern for Mark Giannone, who previously worked at the Federal Reserve Bank’s regional banks in Dallas and New York and now works at Barclays. The final interest rate is expected to rise by a quarter point in November.
Omair Sharif, head of inflation forecasting group Insights, said he was concerned pockets of inflation could resurface in the fourth quarter of the year if sectors such as the auto market remain too hot. He noted that wholesale car prices have already begun to rise. He also keeps a close eye on health insurance costs.
“We will be moving in the wrong direction, from close to target to rising to about 3.5 percent on the core CPI,” he said of his year-end forecast. In July, inflation was hovering at 4.7 percent. As a result, Sharif expected another increase in interest rates in late December.