Fed: Higher rates for longer = soft landing?
The Federal Reserve held steady at its latest meeting. But the central bank is suggesting another rate hike could be in the cards this year...even as inflation slows.
No alarms and no surprises. I’ve often used that Radiohead line to describe how the Federal Reserve operates when it comes to interest rates. And Jerome Powell did his best Thom Yorke impersonation once again Wednesday. The Fed left interest rates alone…as expected.
The jury is still out on whether more rate hikes are in the cards this year though. The so-called dot plot shows that members are expecting one more rate hike this year, and that rates will remain a bit higher next year and in 2025 than what the Fed was indicating in June.
Still, the cetnral bank also bumped up its GDP forecast for this year and next. It lowered its targets for the unemployment rate but mostly left its inflation projections unchanged. So inflation pressures are moderating but aren’t completely back to normal historical ranges yet.
In other words, the Fed is hoping/expecting a so-called soft landing is possible….even though Fed chair Jerome Powell was quick to say during a press conference that a soft landing is not a baseline expectation…even though it is a “plausible” outcome.
Wall Street wasn’t sure what to think of that. Stocks were mixed in late afternoon trading. But it could be a concern that, on the surface, the Fed seems more hawkish than what investors were expecting.
“The decrease in the number of cuts in 2024 is one of the more telling changes this month,” said Vanguard senior economist Andrew Patterson in a report. “It means (combined with the increase in growth expectations and cut in unemployment rate for that year) that the Fed is increasingly confident that they can pull off a soft landing and that the economy can withstand higher rates for longer.”
That’s a big if. The Fed seems so intent on making sure inflation pressures cool further that it is willing to take a slower and more careful approach to cutting rates. Powell said during the press conference that the economy does have “significant momentum.” But whether or not that continues remains to be seen. Higher rates for longer may lead to a harder landing than the Fed, investors and consumers would like. All the talk about the economy avoiding a recession could turn out to be just a pipe dream.