Federal Reserve’s Wait-and-See Approach Amid Strong Economic Growth
November 2, 2023
US Treasury Announcement and Federal Reserve Monetary Policy
The market is keenly anticipating a refund announcement from the U.S. Treasury. However, that’s not the only pertinent economic event on the radar. The focus is also on the latest stance of the Federal Reserve on monetary policy, which will be disclosed this afternoon.
As with the previous meeting, it’s widely expected that the FOMC will maintain its policy rate within the 5.25%–5.50% range. Yet, they may consider additional tightening if required. This cautious approach has led many investors to give considerable attention to incoming economic data; notwithstanding, there won’t be any fresh economic forecasts at this meeting, instead focusing on “the policy statement and press conference by Fed Chair Jay Powell.”
The Complications of the U.S. Economy and Federal Reserve Actions
Balancing a consistently strong U.S. economy with geopolitical risks presents a challenge in the Federal Reserve’s attempt to alleviate price pressures. A couple of weeks ago, Powell hinted that sustained robust economic health could prompt an upturn in inflation that calls for further tightening measures.
He’s also aware that the effects of past central bank-imposed rate hikes have yet to fully manifest themselves. Adding another layer to this complex situation are long-term Treasury yields, which have noticeably increased in recent weeks, thereby performing some of the Fed’s roles.
The Debate over Conventional Economic Models
The appropriateness of traditional economic models—such as one linking growth to inflation—in current settings has sparked debates. Austan Goolsbee, Chicago Fed President and FOMC member stated that “strict adherence to simple historical associations between growth, labor market conditions, and inflation—considering positive supply developments—could lead us into overshooting and potentially provoke an unwarranted economic downturn.”
The credibility of the central bank to keep inflation expectations stable is a key factor that could change how the current economic situation is understood. This is different from times when inflation was high in the past.
Analyst Commentary: Data-Dependent Approach versus Wait-and-See Approach
“The trouble with the ‘data-dependent’ viewpoint is that current data fails to justify the pause“, professes analyst Damir Tokic. He references factors like a Q3 Q/Q GDP growth rate of 4.9%, full employment, an extremely constricted labor market, and inflation-provoking widespread labor strikes as confounding the Federal Reserve’s stance.
He also highlights the present core CPI inflation rate at 4.1%—double the Fed’s 2% inflation target—and a range of escalating worldwide tensions. “Therefore, this isn’t so much a ‘data-dependent’ strategy but rather a ‘wait-and-see’ or perhaps even a ‘wait-and-hope’ strategy,”, he concludes.