The Federal Reserve left interest rates unchanged Wednesday but signaled that future rate hikes are still possible if that's what it takes to curb stubborn inflation.
This was the second meeting in a row in which policymakers held rates steady at 5.25% to 5.5%, following an aggressive series of increases over the previous year-and-a-half.
Inflation has fallen significantly since hitting a four-decade high last summer, but prices are still climbing faster than the Fed's target of 2% per year.
Despite the sharp run-up in borrowing costs, consumers are still spending freely on cars, restaurant meals, and Taylor Swift concert tickets. The nation's economy grew at an annual pace of 4.9% in July, August, and September, with personal spending driving much of that increase. The Fed noted that "strong" pace of growth in announcing its decision.
"The economy has been remarkably robust despite the fastest pace of interest rate increases in 40 years," said Greg McBride, chief financial analyst at Bankrate. "The Fed may feel the need to raise interest rates at some point down the road, simply because the underlying economy is doing as well as it is."
Ready to act
For now, though, the Fed is content to play wait and see. That's partly because the effects of the earlier rate hikes are still being felt. Policymakers said in a statement they would consider "the lags with which monetary policy affects economic activity and inflation" in deciding whether additional rate hikes are necessary.
The Fed is also monitoring the job market, which has shown remarkable resilience in the face of rising interest rates. Unemployment has been under 4% for 20 months in a row. That streak will likely be extended to 21 months when October's jobless rate is reported on Friday.
The tight job market continues to put upward pressure on wages. Employers' cost for wages and salaries rose 4.6% for the twelve months ending in September, the Labor Department reported Tuesday. While that's a smaller increase than the previous year, it's likely to keep prices climbing faster than the Fed's 2% target.
Borrowing costs have risen
In addition to the Fed's moves on short-term interest rates, long-term borrowing costs — which are set by the bond market — have also been going up. The average cost of a 30-year home mortgage, for example, is now 7.79% according to Freddie Mac -- the highest since 2000.
That's tamped down demand for houses and related items such as furniture and appliances, taking some pressure off the Fed.
"The rise in long-term rates has done some of the Fed's dirty work for them," McBride said. "They can afford to sit back and not raise short-term interest rates at this point because the move up in long-term rates has been so pronounced, and it has the effect of reducing demand in the economy."
The Fed has already raised short-term interest rates eleven times since March of last year, pushing its benchmark rate from near zero to the highest in over 20 years.
Policymakers signaled in September that, on average, they expect one more quarter-point rate increase by the end of the year. The next rate-setting meeting is scheduled for mid-December.
Even though September saw minimal changes in job openings, the Labor Department reported that there were 9.6 million job openings during that month. This number is slightly higher than the revised total of 9.5 million openings in August. The figure exceeded economists' expectations of 9.3 million openings. Additionally, the rate of workers quitting their jobs remained unchanged at 2.3 percent for the third consecutive month.
The Federal Reserve closely monitors job openings as an indicator of the economy's state. Since March 2022, the Fed has been raising interest rates to combat inflation, with the goal of achieving a "soft landing" where inflation is controlled without causing a significant rise in unemployment. The Fed is expected to maintain a target range of 5.25 to 5.5 percent for interest rates in their upcoming meeting.
The recent trend of slowing job openings suggests that the rate increases have indeed cooled the economy. While job openings reached a record high of over 12 million in March 2022, they have been on a downward trend since then. Similarly, the rate of job quitting has decreased, while separations have remained steady. In September, there was a slight increase in job openings, but the number of openings per unemployed worker remained the same as in August at 1.5.
This reduced churn in the labor market indicates the impact of the rate increases. According to Julia Pollak, the chief economist at ZipRecruiter, there has been less hiring activity, and fewer new employees are receiving pay increases, signing bonuses, or being actively recruited. These observations suggest that the rate increases have been effective in cooling down the labor market.
It is important to note that despite the slowdown in job openings, the number of openings is still significantly higher than pre-pandemic levels, indicating a tight labor market. Additionally, inflation remains above the Fed's 2 percent target, with the preferred inflation measure falling to 3.4 percent. The Fed's primary focus remains on inflation and its impact on future inflationary trends.
Economists at Bank of America expect the Fed to raise rates one more time in December to achieve a soft landing. This is supported by the recent acceleration in economic growth during the third quarter and the higher than expected wage growth. The upcoming October jobs report, to be released by the Labor Department later this week, will provide further insights into the job market and its impact on the economy.
In summary, job openings have been on a slowing trend, indicating the efficacy of the Fed's rate increases. The tight labor market and inflation above the Fed's target remain key considerations for future monetary policy decisions.