The Fed wants to cool spending; a strike, a shutdown and student loans may add ice

the-fed-wants-to-cool-spending;-a-strike,-a-shutdown-and-student-loans-may-add-ice
The Fed wants to cool spending; a strike, a shutdown and student loans may add ice

U.S. Federal Reserve officials are meeting this week amidst new risks to their goal of squelching inflation without a recession. These risks include an autoworkers strike, a possible federal government shutdown, and the resumption of student loan repayments. The strike, launched by the United Auto Workers against all three major automakers, could potentially grow in size. Federal elected officials have until the end of September to reach a deal or federal agencies will have to close. Additionally, negotiations for a deal have been hindered by congressional Republicans. Student loan repayments, which were suspended during the COVID-19 pandemic, will restart in October.

While each of these events may not individually shift policymakers’ perception of short-term risks or their focus on controlling inflation, the combination of prolonged disruptions in the auto industry and federal agencies could have unpredictable consequences. These consequences include a decrease in consumer spending, potential increases in car prices that would undermine the Fed’s fight against inflation, and a decline in business and consumer confidence that could lead to a downturn rather than a “soft landing.”

Goldman Sachs economists have warned of a potential “pothole” in the fourth quarter of the year, which could reduce gross domestic product (GDP) growth by more than a percentage point. According to Goldman’s estimates, the economy would still be growing at a 1.3% annual rate at that point. However, the projected decrease in GDP is greater than the 1% growth rate expected by Fed officials in June and many private forecasts.

Vincent Reinhart, chief economist at Dreyfus and Mellon and former head of the Fed’s monetary policy division, highlights the vulnerability of the economy due to aggressive Fed interest rate hikes, tightening credit from banks, and the depletion of pandemic-era savings by consumers. He suggests that even minor shocks could derail the economy, especially as the drawdown of the Fed’s balance sheet reaches levels that could unexpectedly tighten financial conditions.

The Fed is expected to maintain its policy rate at the upcoming meeting, but any emerging risks may influence the atmosphere and language surrounding the meeting. Central bankers have been providing limited guidance on future decisions, as they are divided about the next steps. Recent economic data has generally favored the Fed, with inflation decreasing while the economy continues to grow and add jobs.

However, the shutdowns in the auto industry and federal agencies could have a detrimental impact on growth and confidence. A prolonged strike could reduce vehicle production by a third and potentially shave 0.7 percentage point from growth. Similarly, a government shutdown, like the one in 2018-2019, could result in a 1% reduction in annualized output. The effects of these events on consumer spending and inflation are uncertain, but they could potentially slow growth temporarily.

While previous government shutdowns have had little lasting impact, inflection points where households and businesses simultaneously retrench are difficult to predict. The resumption of student loan repayments may already be influencing behavior, as evidenced by a drop in online searches for travel and dining. Retail sales in August were primarily driven by higher gasoline prices, with other sales rising by just 0.2%.

If the economy takes a turn, the Fed is unlikely to intervene until the inflation fight is resolved, which would maintain high interest rates and add further pressure on firms and families. Despite the risks, the Fed has been prepared for a potential recession for a year and a half.

In conclusion, the meeting of U.S. Federal Reserve officials this week takes place amidst new risks to their goal of controlling inflation without a recession. The autoworkers strike, potential government shutdown, and resumption of student loan repayments pose challenges to the best-case outcome. The combination of these events could have unpredictable consequences for the economy, including reduced consumer spending, potential increases in car prices, and a decline in confidence. Goldman Sachs economists warn of a potential “pothole” in the fourth quarter that could significantly impact GDP growth. The vulnerability of the economy, coupled with the drawdown of the Fed’s balance sheet, adds to the risks. The Fed is expected to maintain its policy rate at the meeting, but any emerging risks may influence the discussions. The impact of the strike and government shutdown on growth and inflation is uncertain, but they could temporarily slow down the economy. The resumption of student loan repayments may already be affecting consumer behavior. If the economy falters, the Fed is unlikely to intervene until the inflation fight is resolved. Despite the risks, the Fed has been prepared for a potential recession for some time.

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

Have a tip we should know? tips@rhd.news

Most Read

  1. News
    Pandora Papers Financial Leak Shows Us the Secrets of the World’s Rich and Powerful
    3 years ago
  2. Health
    US Supreme Court Rejects J & J TALC Cancer Case Appeal
    3 years ago
  3. Lifestyle
    9 Habits that Drain your Daily Focus and How to Avoid Them
    3 years ago
  4. BUSINESS
    Women’s Demand for Shapewear – the big Trends
    3 years ago
  5. BUSINESS
    Valentino Launches its Cosmetics Line
    3 years ago
  6. Health
    US Promises to Share 60 million Doses of AstraZeneca Vaccines
    3 years ago
  7. Health
    UK Offers Aid Amid Surging COVID-19 Cases in India
    3 years ago
  8. Sports
    Thousands of fans welcome Charlton funeral cortege at Old Trafford
    7 months ago
  9. News
    Brit left fighting for life after train derails in Argentinia
    7 months ago
  10. BUSINESS
    Dubai faces down airline rivals with $50 bln jet orders
    7 months ago
  11. Sunak
    UK’s Sunak brings back Cameron, sacks Braverman
    7 months ago
  12. Sports
    Man United’s Hojlund, Eriksen withdrawn from Denmark team duty
    7 months ago
  13. Health
    Autumn Sneezing Syndrome is on the rise… here’s what you can do
    7 months ago
  14. Canada
    Canada beat Italy to win Billie Jean King Cup for first time
    7 months ago

Follow @rushhourdaily: