The Fed’s Last Big Decision of 2023 Could Set Americans Up For Some Relief Next Year

Article originally posted on HERE on December 12, 2023

The nation’s central bank is about to make its last big decision of 2023. It could signify good things to come for Americans in the new year.

On Wednesday, the Federal Reserve will announce whether it will continue its pause on interest rate increases, and market-based predictions expect it to do just that — the CME FedWatch Tool, which estimates probabilities for interest rate changes, predicted a 98% chance the Fed will continue its pause as of Tuesday morning.

The Fed has tapped the brakes on its war against inflation in the past few Federal Open Market Committee meetings following a series of consecutive rate hikes, and it’s a good sign for the country’s pandemic recovery — inflation has continued to cool based on new Consumer Price Index data out Tuesday, inching toward the Fed’s 2% inflation target.

That report from the Bureau of Labor Statistics showed that consumer prices overall rose 3.1% year over year in November. That’s just below October’s change of 3.2%. The energy index saw a year-over-year decline of 5.4% in November while shelter increased by 6.5%.

Federal Reserve Chair Jerome Powell indicated during the press conference after November’s meeting that while inflation is still not where it needs to be, he’s confident in the progress the economy has made.

“The risk of doing too much versus the risk of doing too little are getting more closer to balance,” he said.

However, he did note that interest rate cuts are not the central bank’s focus right now.

“We’re not talking about rate cuts,” Powell said. “We’re still very focused on the first question, which is, have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2% over time sustainably?”

Additionally, while some people in the labor market, such as many in corporate work, may be finding it harder to change jobs compared to 2022, the labor market is still robust. The US labor market added 199,000 jobs in November, according to new Bureau of Labor Statistics data published Friday. That was above the forecast of 180,000.

The labor force participation rate improved from 62.7% in October to 62.8% in November, which was also the rate back in August and September. The unemployment rate declined from 3.9% in October to 3.7% in November. Wage growth also hasn’t been surging and instead has generally slowed, based on year over year changes of average hourly earnings.

Despite the steady decline in nominal wage growth, there are signs that the pressure could be easing off on Americans’ wallets. A news release from BLS on Tuesday showed real average hourly earnings was still positive, with a month-over-month increase of 0.2% in November, like it was in October. Year-over-year, the increase was 0.8% in November. With another positive data point, workers are seeing their buying power edge back up amid the inflation slowdown.

Amid average hourly earnings “slowing very gradually,” Julia Pollak, the chief economist at ZipRecruiter, told Business Insider “the Fed will be rather pleased” with the employment report out on Friday.

“I think they wish they were seeing a faster slowdown in wage growth,” Pollak said.

She noted average hourly earnings of production and nonsupervisory employees rose 4.3% year over year in November. That comes after year-over-year increases of 4.4% for both September and October.

Nick Bunker, economic research director for North America at the Indeed Hiring Lab, told Business Insider on Friday after the release of the new jobs data that the Fed will “enjoy what they see,” at least in the short term, and that they will “do nothing in the sense that as expected, I don’t think this is going to push them either way in December.”

Bunker said he thinks the Fed “can continue to be patient in figuring out what the right level of interest rate’s going to be over the long term because it doesn’t look as though the labor market is really deteriorating” and has found “a good balance” after running hot as the country recovered from the pandemic.

Of course, interest rate cuts are likely top of many Americans’ minds as they enter 2024. Even though Powell has not indicated when cuts might happen, Bank of America recently predicted that interest rate cuts will come in the middle of next year.

“2023 defied almost everyone’s expectations: recessions that never came, rate cuts that didn’t materialize, bond markets that didn’t bounce, except in short-lived, vicious spurts, and rising equities that pained most investors who remained cautiously underweight,” Candace Browning, head of BofA Global Research, said in a statement. “We expect 2024 to be the year when central banks can successfully orchestrate a soft landing, though recognize that downside risks may outnumber the upside ones.”

Bunker said recent wage growth trends seem “very sustainable and consistent with low inflation.”

He said he thinks the Fed will “be heartened by this and it’s probably going to allow them to take stock of what’s happening with inflation.” Bunker added if this continues, then it would add to the likelihood of a soft landing.