While you’re busy handing out candy to trick-or-treaters, Federal Reserve officials are doing something a lot less riveting, most people would say.
After finishing the first day of their two-day meeting, they’re probably still thinking about all the discussions they had about the economy. Then tomorrow comes the big decision on interest rates.
But this time around, it doesn’t feel like such a big decision. That’s because the central bank is widely expected to hold interest rates steady for the second meeting in a row.
It may seem a little strange given all the recent data that’s suggesting the economy is doing really well. Or as many economists are implying, scary well.
That’s because what may appear like good news for the economy isn’t necessarily that good.
For instance, last week’s gross domestic product report, which showed the economy grew at a remarkably strong pace in the third quarter, on the surface sounds like something worthy of celebrating. The Biden administration certainly did.
But in my view, good economic reports are ones that show sustainable trends. And in many economists’ view the third-quarter GDP report shows the economy isn’t growing at a sustainable pace.
In other words, the good times may not last very long before the party’s over and the economy wakes up with a big hangover.
Some FAQs
Q: If the economy is growing too fast, why isn’t the Fed doing something about it?
A: The Fed has been doing something about it for the past year-and-a-half. By raising interest rates to the highest level in 22 years, the central bank has slowed the economy in many ways. For instance, fewer jobs are being added each month compared to a year ago. The problem is it can take some time for the impact of interest rates to be felt across the economy. That’s why the Fed is trying to proceed cautiously right now.
Q: Bond yields are already so high. Isn’t that basically an interest rate hike anyway?
A: Yes, that’s correct. Bond yields, namely the yield on the 10-year Treasury note, dictate the interest rates on credit cards, mortgages and auto loans. When those rates go up, borrowing money becomes more expensive. Hence, they’re essentially accomplishing the same thing a Fed rate hike would. And that’s one of the reasons the Fed likely won’t be raising interest rates tomorrow.
Q: So are we getting that rate cut any time soon?
A: I wouldn’t bank on it. The general sense I’m getting is that the Fed may be done hiking but they’re going to keep rates high for a while.
Read the full article here