Markets widely expect the Fed to skip a rate increase at its September 19-20 meeting. However, market pricing still points to about a 38% probability of a final hike at the Oct. 31-Nov. 1 meeting, according to CME Group data.
Recent data has painted a mixed picture of where the economy is headed, with overall growth holding steady as consumers continue to spend, but the labor market beginning to loosen from historically tight conditions.
Job openings, for instance, fell to 8.83 million in July. That’s still well above where they were prior to the Covid pandemic but is the lowest level since March 2021. That equated to 1.5 openings for every worker the BLS counts as unemployed.
At the same time, inflation has shown signs of cooling even though it remains well above the level where Fed policymakers feel comfortable.
The Commerce Department reported earlier this week that personal consumption expenditures prices, the Fed’s preferred inflation gauge, rose just 0.2% in July. That equated to a 3.3% 12-month gain, or 4.2% when excluding food and energy — the “core” level that the Fed thinks is a better measure of longer-term inflation.
Consumer spending was strong during the month, rising 0.6% when adjusted for inflation even though real disposable personal income fell 0.2%. Households have been using credit cards and savings to compensate, as the personal savings rate fell to 3.5% in July, down sharply from the 4.3% level in June.
The department also reported that gross domestic product increased at a 2.1% annualized rate for the second quarter, a level that is still above what the Fed considers trend growth for the U.S. economy but below the initial 2.4% estimate.
However, the Atlanta Fed is tracking third-quarter GDP growth at a robust 5.6% pace. That counters long-running expectations that the economy is likely to hit at least a shallow recession following a series of aggressive Fed interest rate hikes.
