Inflation war: Federal Reserve eases back but continues streak of interest rate hikes

Almighty Originals manager Jamison Parker counts a customer’s change at the Shops at South Town in Sandy on Nov. 25, 2022. As widely expected, the Federal Reserve announced a .25% increase to its benchmark lending rate Wednesday. (Ben B. Braun, Deseret News)

Estimated read time: 6-7 minutes

SALT LAKE CITY — As widely expected, the Federal Reserve announced a .25% increase to its benchmark lending rate Wednesday, continuing a streak of rate hikes over the past year aiming to quell U.S. inflation that has been running at or near 40-year highs.

It’s the eighth consecutive rate hike instituted by the monetary body going back to March 2022 and pushes the interbank overnight lending rate to the range of 4.5% to 4.75%, the highest since 2007. In a statement, the Fed also signaled it was prepared to adopt additional increases to reach its target inflation goal.

“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the statement reads.

In a press conference following the Federal Reserve Board’s January meeting, Fed Chairman Jerome Powell said he expected the U.S. economy would experience “subdued growth” in 2023 but not slip into a recession. When asked about the possibility that the Fed board would choose to take a rate hike pause at its meeting scheduled for March, Powell said it would be a bigger mistake to stop too early than walk back rate increases at some later date.

“I continue to think that it’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we were close but didn’t get the job done and inflation springs back,” he said.

But if inflation drops more quickly than the Fed is estimating, Powell said the board “has the tools to work on that.”

Powell said while inflation is coming down across a large swath of the economy, an even larger segment, core services excepting the housing sector, have still not seen any easing. And that reality, he said, is the driving factor behind likely additional rate hikes.

Where is inflation right now?

After hitting a high of 9.1% in June 2022, U.S. inflation marked six straight months of declines in December with the overall rate coming in at 6.5% over the same time last year and down from 7.1% in November, according to a federal report.

The Labor Department released its December Consumer Price Index Summary in January noting the 12-month inflation rate came in at its lowest mark since October 2021 and average prices on goods and service dropped .1% from November to December, the first monthly downtick since May 2020.

Big drops in gasoline prices helped drive the decrease even as the average costs for food and shelter bumped up from December. The average cost of gas across the country in December was down 9.4% from November while groceries rose .3% and shelter costs moved up .8%. Over the same time last year, groceries prices are up 10.4% and the cost of shelter was 7.5% over December 2021.

Utah is among Mountain West states that experienced nation-leading regional inflation rates for much of 2022 and that distinction continued in December with inflation running at 7.4% for the area, the highest in the country.

The Federal Reserve has pitched a yearlong battle against the elevated prices of goods and services, instituting the most aggressive series of rate hikes in decades in an attempt to cool off the red-hot economy.

The rate hikes aim to raise the cost of debt for businesses and consumers which should, theoretically, reduce the amount of spending and overall economic activity, a shift in dynamics that typically brings inflation rates down.

While consumer spending remained robust throughout most of last year and that, along with a sizzling labor market, helped buoy elevated inflation, some cracks are finally starting to show in consumer habits.

Are recession worries finally quelling consumer spending?

The long-running, robust consumer spending trend has been driven by pandemic stimulus funding that helped boost U.S. household savings to a record $2.3 trillion in 2021, according to an October 2022 report from the Federal Reserve. And while a good chunk of that savings, around two-thirds or so, is still in the bank for most households, some cracks are starting to show in how much, and where, consumers are spending their hard-earned dollars as recession worries continue to linger.

Here are a few data points reflecting what’s happening right now when it comes to consumer habits:

  • Upticks in consumer debt accumulation and reductions in current personal savings rates (now hovering around 2.3%, the lowest in decades) may also be exacerbating those concerns.
  • A shopper insights survey from Acosta found 61% of consumers claim they are eating out less, and 52% are spending less on entertainment.
  • U.S. retail sales fell in December, marking the third drop in four months. Back in October, Wells Fargo economists predicted the 2022 holiday shopping season could very well be a coda, marking the end to the streak of teflon-coated consumer spending rates.
  • “Now more than halfway through January, attention shifts to what this means for consumption in 2023,” Wells Fargo economists wrote in a report released last month. “Essentially, after pandemic-era stimulus and excess cash have boosted goods consumption the past few years, we expect it’s becoming more challenging for consumers to maintain such a robust pace of spending.”
  • A new report from Morning Consult said that December showed slowing inflation for the sixth straight month, while consumer spending was down 4.3% in December.
  • “Heightened budgetary pressures brought on by persistently high inflation are forcing trade-offs for consumers, leading to reallocation across categories,” the report said.
  • It noted that “consumers across all income groups reported gradually weakening financial conditions.”

What’s in store for Utah’s economy in 2023?

A report from the Utah Economic Council released in January predicted Utah’s economy could go one of three ways in the year ahead — continue moderate GDP growth of 2% to 4%, see growth slow to 0% to 2% or slip into a moderate recession where the state’s GDP could contract by around negative 1%.

So, why did the economic council, a collaboration of the University of Utah’s David Eccles School of Business and the Governor’s Office of Planning and Budget, present a grab-bag projection for the coming year?

Current economic conditions have been roiled thanks to a set of extraordinary functional and financial circumstances and, thus, have never had to be figured into economic prognostications. A global public health crisis, subsequent widespread disruptions to product supply chains, seismic shifts in consumer behavior and government-backed cash inputs such as individual stimulus checks and massive business subsidies have blown up the previous models when it comes to guessing what’s coming next.

“The post-pandemic economy has altered many traditional economic relationships,” the report reads. “These economic transformations make accurate predictions challenging because it’s unclear if or when old patterns will return, or if new arrangements will chart a different economic course.”

The main takeaway from the report, which was presented to Utah Gov. Spencer Cox at an economic summit last month, was a simple message that applies to budget decision makers at every level — be ready for anything.

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