The Federal Reserve opened its two-day policy meeting on Sept. 15 as officials weigh elevated inflation, rising rates and the economic uncertainty introduced by the U.S.-Iran conflict.
Annual headline consumer inflation held at 3.4 percent in August for the second consecutive month. The 12-month core inflation rate, which excludes food and energy, eased to 2.4 percent, its lowest level since March 2021. Job growth rebounded in August, with the economy adding 162,000 positions, and the unemployment rate remains at 4.1 percent, with workforce participation recovering.
Markets have fully priced in a quarter-point interest rate increase at this meeting, which would raise the benchmark federal funds rate to a target range of 3.75 percent to 4 percent. The federal funds rate influences borrowing costs for businesses and consumers throughout the economy.
What officials are weighing
The Fed’s dual mandate requires it to keep inflation near 2 percent and maintain maximum employment. With core at 2.4 percent and headline at 3.4 percent, both remain above target, and the upside risks introduced by the Iran conflict and higher energy prices give officials reason to continue the rate-hiking path.
At the same time, the labor market data released since July’s meeting has been strong rather than softening. A strong labor market is both a signal of economic health and a potential contributor to inflationary pressure, since tight employment tends to support wage growth that can feed through to prices.
The Iran factor
The conflict between the United States and Iran, which began in February, has added an oil price dimension to the inflation outlook. Higher energy prices flow through to transportation costs, manufacturing inputs and prices broadly. The conflict has also introduced uncertainty about global trade flows and financial conditions that the Fed and other central banks typically incorporate into their assessments.
The rate decision and what follows
A quarter-point increase to a 3.75-to-4 percent federal funds rate range would represent the continuation of a hiking cycle that began in March 2022. The Fed has signaled throughout this period that its decisions are data-dependent and meeting-by-meeting, meaning it will evaluate subsequent readings on inflation, employment and financial conditions before deciding whether to raise, hold or eventually cut rates.
The two-day meeting concludes Sept. 16, when Federal Reserve Chair Jerome Powell is expected to hold a news conference following the rate decision.
