The Federal Reserve is expected to hold interest rates steady this week as the central bank faces a slew of economic and political risks while attempting to quash inflation.
The Federal Open Market Committee (FOMC), the panel of Fed officials responsible for setting interest rates, will wrap up a two-day meeting Wednesday and likely keep borrowing costs unchanged.
Experts expect the Fed to tread carefully as the economy perches on a ledge of shifting indicators and divergent projections.
While inflation has accelerated for two consecutive months, a steadier slowdown in hiring, job openings and economic growth could be the signs of the Fed’s rate hikes taking hold.
“The effects of the interest rate hikes have not been seen widely because typically it takes about five quarters to see the real impact,” Mohammad Bhuiyan, a professor of entrepreneurship at Tuskegee University in Alabama, told The Hill.
Bhuiyan said it takes roughly 15 months for rate hikes to hit the economy.
“That’s the lag time,” he said.
A pause would allow the Fed to step back and see if the economy continues to slow before its next meeting in November.
Some Democrats and progressive policymakers insist the Fed has already done enough to curb inflation and risks throwing the economy into an avoidable recession.
But the Fed is also facing growing criticism from Republicans, including a cadre of presidential candidates who are pledging to make major changes at the central bank if elected.
Political consequences of the Fed’s inflation fight
Whether the Fed succeeds in curbing inflation without causing a recession could have serious implications for the 2024 presidential election.
President Biden has already been campaigning on his economic track record during the pandemic and the rapid recovery seen during his presidency.
“When I came to office and this nation was flat on its back, I knew what to do to vaccinate the nation, to rebuild the economy,” he said at a campaign event at the Lunt-Fontanne Theater on Broadway on Monday night.
While Biden presided over record-shattering job gains and a historically strong labor market, many Americans are sour on his economic record due largely to inflation.
More than half of respondents to a CNN poll from earlier this month said Biden’s economic policies had made the economy worse, and another poll found greater trust in former President Trump’s handling of the economy.
Political consequences of the Fed’s inflation fight are also materializing for Fed Chairman Jerome Powell, with Republicans grumbling that central bankers got started raising interest rates too late.
Powell is a registered Republican who has won broad bipartisan support both times the Senate votes on his confirmation as Fed chief but is unlikely to be reappointed if Biden loses.
“I would not reappoint him. I thought he was always late, whether it was good or bad, but he was always late,” said Trump, who nominated Powell to be Fed chairman and then feuded with him throughout his tenure, in an interview with the Fox Business Network in August.
Former Vice President Mike Pence and Florida Gov. Ron DeSantis (R) have also vowed not to renominate Powell.
“From COVID on, they put too much money into the economy,” DeSantis told CNBC last month.
“They were behind the ball on that. And then they’ve hiked so much now, it’s caused a lot of problems in the economy and could end up driving us into a recession,” he said.
A strong but straining labor market
The U.S. labor market, which was given steroids in the form of trillions of fiscal and monetary stimulus during the pandemic, has remained remarkably strong in the face of the Fed’s rate hikes. But signs of cooling are now evident.
The quits rate, a sign of worker confidence in the labor market, has fallen from a recent high in April of last year of 3 percent down to 2.3 percent in July.
The economy has been adding fewer jobs on a monthly basis since the beginning of the year, with some ups and downs. After adding 472,000 jobs in January, that number fell to 105,000 in June, bucking up to 157,000 in July and 187,000 in August.
The unemployment rate ticked up in August to 3.8 percent after hovering near historic lows since roughly March of last year.
“When you raise interest rates, it becomes more expensive for businesses to borrow, so that cuts into their profitability and they cut their borrowing,” Bhuiyan said.
“When that happens, they have less money to work with, which means they need to cut workers — that’s the first place they go,” he continued.
Higher unemployment does not affect all segments of the population equally.
The unemployment rate for Black workers, which hit an all-time low of 4.7 percent earlier this year, is still consistently higher and more volatile than it is for white workers.
“I am concerned that we could lose what has become an indicator that the Black community has been really pleased about overall. There was a time in our history when the Black unemployment rate did not go below double digits,” Michelle Holder, an associate professor of economics at John Jay College in New York City, told The Hill.
“I absolutely remember what it was like … at that time, where it was just accepted that our community would be dealing with high unemployment — period,” she said.
Conflict in an overwhelmed housing market
Another pressure point for the Fed is the housing market, where much of the inflation that remains in the economy is located.
“Housing makes up the most significant and most enduring component of our measures of inflation. Unlike the price of gas or the price of toilet paper, housing costs are the biggest expense for most poor and working-class people,” Tara Raghuveer, housing activist and founding director of KC Tenants, a tenants’ rights organization in Kansas City, told The Hill.
“The cost of housing and specifically the rate of rent increase — the fact that the rent is too damn high — is an incredible stress point for the American people,” she said.