Knowledge Center

Monthly Economic Insights- October, 2023

With progress on inflation control, Fed signals rate pause – for now

Over the last 20 months, the Fed has raised interest rates at the fastest pace in four decades, most recently to a 22-year high of between 5.25% and 5.5%, to combat inflation that soared to 40-year highs.

The good news is it appears to be working, and the Fed held steady on rates for the second straight time in its November meeting.

On the topic of progress, the Labor Department reported earlier this month that its index of overall consumer prices rose a seasonally adjusted 0.4% in September compared to August, which was slightly higher than prevailing estimates (0.3%) leading up to the report.

Overall prices were 3.7% higher than a year earlier. Core inflation, which excludes energy and food to better track inflation’s underlying trend, rose 0.3%, putting it up 4.1% so far this year.

With unemployment holding at 3.8% in September (unchanged from August) and job openings ticking back up to 9.6 million (up from 8.8 million in July), the job market roller coaster continues. But that may be part of the new norm, along with inflation numbers that may be settling permanently around 3%, well below the alarming rates of last year but still above the 2% inflation rate target of the central bank.

Since inflation is essentially driven by too many dollars chasing too few goods and services, it's important to consider other market factors beyond Fed interest rate levels. For example, student loan payments are restarting this month and are likely to absorb some of these extra dollars.

Some economists estimate that the return of student loan payments may suck anywhere from $70 billion to $200 billion from the economy annually, as borrowers must now divert their money from everyday goods, services or other debts back toward student loan payments. Estimates we have seen suggest anywhere from around $300-$400 per month in student loan payments on average.

It is also interesting to note that with student loan payments restarting, we are seeing a record number of subprime borrowers more than 60 days delinquent on their auto loans (now at 6.1%) – the highest on record going back to 1994.

Bottom Line: Healthy economic data won’t allow the Fed to declare an end to rate hikes but a pause this month is expected.

Fed forecasting remains tricky because even though economic activity has defied projections of recession, the data is still mixed. Inflation has declined, supply chains have healed, and the demand for goods, services and workers has eased.

The key concern ahead is whether wage growth and robust consumer spending will persist and possibly hamper efforts to reduce inflation. This situation might necessitate a need for further tightening of monetary policy.

While the Fed can claim progress on inflation, it certainly can’t claim victory yet.

Marcus Scott photo





— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company

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