The last few months we’ve seen a lot of movement with the economy. The Federal Reserve cut interest rates twice amid the middling job market, while inflation seemed to be stagnant or on the decline. However, while inflation seemed to be under control, and while the labor market continued to “cool,” a new inflation report from the U.S. Bureau of Labor Statistics showed that inflation was actually increasing. This is bad news for the economy, and the Fed, as interest rate cuts are there to help boost spending, but if prices are immediately jumping back up, we are looking a difficult to control issue for the Federal Reserve.
Interest Rate Cuts
After cutting interest rates half a point a over month ago, the Federal Reserve announced another 0.25% in interest rate cuts on November 7th. Meanwhile, while the Fed cut rates in September, mortgage rates continued to creep up. On November 7th, mortgage rates were at a 4-month high at 6.79% for a 30-year mortgage. Unfortunately for those looking for homes, mortgage rates continued to grow, while home prices creeped back up after an all-time high in June.
The latest rate cuts in November hopefully will hold some strength, as mortgage rates dropped by 0.01% this week. The number is far from encouraging, but a break in the trend would be helpful for relief of some. Increasing mortgage rates and a weak labor market meant that the Federal Reserve was going to have to continue to cut interest rates. But this week we have had some different news that may lead us into a change of directions.
Inflation Increase
Yesterday we had bad news for the movement of the economy. While we had hoped that inflation would continue to drop, we saw a 0.2% increase. Food prices continue to increase, while engergy prices, especially gasoline, continue to decline. Over a 12-month period, the un-adjusted inflation rate sits at 2.6%. Meanwhile, the Federal Reserve has made it clear that a 2% goal is priority, so this news is distressing.
Higher interest rates serve a purpose within a market. Higher interest rates discourage those from spending, at least spending on high-end items such as homes and cars, and therefore, manufactures a lower-demand, thereby decreasing the prices of items. Inflation was skyrocketing in 2021 and 2022, and that’s when we saw the Federal Reserve step in to increase interest rates, slowing price increases. This is where we see the issue, if just a few weeks after the Federal Reserve drops interest rates across the country both mortgage rates go up and prices go up, we have an issue.
Future Federal Reserve Decisions
After this confusing, and discouraging news, the Federal Reserve may be changing course. Today, the Federal Reserve Chair Jerome Powell released a speech on the economic outlook of the United States.
Regarding the labor market, Powell stated: “The labor market remains in solid condition, having cooled off from the significantly overheated conditions of a couple of years ago, and is now by many metrics back to more normal levels that are consistent with our employment mandate.”
In relation to inflation, “The labor market has cooled to the point where it is no longer a source of significant inflationary pressures.” And future policy from the Federal Reserve? “We are moving policy over time to a more neutral setting. But the path for getting there is not preset. In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks.”
Based off of the latest news from the Federal Reserve, as well as the inflation news from the Bureau of Labor Statistics, the future of economic policy is unclear. Most say the U.S. economy remains strong, but there it unfortunately is unable to hit a point of long-term sustainability or continued strenght. If the Federal Reserve is hesitant to drop interest rates again in December, we might see the mortgage rates jump right back up, but also, we might see a drop in inflation. We will wait to see the data that comes out in December, along with the Federal Reserve’s decision.