American consumers continued to spend at a robust pace in September, indicating the economy’s resilience despite more than a year and a half of Federal Reserve interest rate increases. The Fed’s objective has been to slow down demand in order to control inflation. However, the latest Personal Consumption Expenditures report showed that overall inflation remained steady at 3.4 percent in September, in line with economists’ expectations.
Although this is a positive development, the current inflation rate of 3.4 percent is still higher than the Fed’s target of 2 percent. The question now is whether inflation can slow down further while consumer spending remains strong. If consumers continue to spend, businesses may be able to increase prices. The report revealed that consumer spending increased by 0.7 percent from the previous month, exceeding economists’ forecasts.
Despite the strong spending figures, it is unlikely that the Fed will react immediately by raising interest rates. The policymakers are expected to leave interest rates unchanged at their upcoming meeting. However, if the solid momentum in consumer spending persists, the Fed may become more cautious. The concern is that if there is persistent above-trend growth, inflation consequences could arise.
The Fed has already raised interest rates to 5.25 percent from near-zero levels in March 2022. Many officials believe that interest rates have either reached their peak or are close to it. However, they do not entirely rule out the possibility of another rate increase, given the economy’s strength.
Another report showed that the economy grew at a rapid pace of 4.9 percent in the third quarter, after adjusting for inflation, surpassing forecasters’ expectations. This strong growth and demand for labor have caught the attention of policymakers. Fed Chair Jerome H. Powell stated that further surprises could jeopardize progress on inflation and potentially necessitate tightening of monetary policy.
Inflation has slowed down over the past year due to various factors, including supply chain issues and fluctuations in gas and food prices. The Fed’s higher interest rates may have helped in some sectors, such as the housing market, by curbing price increases. However, wrestling inflation down further could be challenging, as most of the remaining inflation comes from service industries, which tend to have more persistent price increases.
For now, Fed officials are waiting to see if their rate moves will continue to have a cooling effect on the economy. However, there are concerns that growth could soon slow down. The recent increase in longer-term interest rates may weigh on the economy, making borrowing more expensive, and consumers have slightly less disposable income. Additionally, global instability could add to economic uncertainty and risk.
Overall, policymakers are cautiously observing the trends in inflation and consumer spending and will continue to assess whether further action is needed.
