The Fed will announce whether it will raise interest rates or hold them steady on Wednesday.
Most economists predict a pause on rate hikes is coming.
One economist said the US is coming off a "soft landing summer" amid strong GDP growth.
The nation's central bank might ease off of its war against inflation in its next big decision this week.
On Wednesday, the Federal Open Market Committee will announce whether it will raise interest rates again or implement a pause. The decision comes on the heels of inflation ticking back up in August — the Consumer Price Index rose 3.7% year-over-year — showing the Fed still has work to do to reach its 2% inflation target, and suggesting another interest rate hike might be on the horizon this year.
After the Fed raised interest rates by 25 basis points in July, though, Federal Reserve Chair Jerome Powell said he is no longer forecasting a recession for 2023 and that the economy could achieve a "soft landing," meaning inflation comes down while avoiding a severe economic downturn.
"We've come a long way," Powell said at the July press conference. "We are resolutely committed to returning inflation to our 2% goal over time."
Many economists agree with Powell's sentiment and are expecting a pause in hikes. This has been a "soft landing summer," as Jan Hatzius, chief economist at Goldman Sachs, put it at a recent NYU's Stern Economic Outlook Forum.
"I think a lot of what we've seen, especially over the last few months, is strongly supportive of our soft landing views," Hatzius said.
Why economists are feeling good about the economy
The labor market is still strong but cooling down to more sustainable levels, which is exactly what the Fed wants to see. The unemployment rate climbed a bit, from 3.5% in July to 3.8% in August, but the bulk of that increase was from people coming off the sidelines and re-entering the the labor force.
Job growth has slowed through the summer, but remains higher than the pre-pandemic average. Nick Bunker, economic research director for North America at the Indeed Hiring Lab, told Insider after the labor market report from the Bureau of Labor Statistics earlier this month that job growth, and wage growth, has broadly been trending down.
"Directionally, the data's moving in a way that the Fed would like to see, and it's not quite at the levels they're probably comfortable with," Bunker said.
Julia Pollak, chief economist at ZipRecruiter, told Insider that she believes the Fed would "be very pleased" with that BLS report.
"It might suggest that yes, raising interest rates slowed the labor market, but that slowing came mostly in the form of declining openings, not job losses and rising unemployment," Pollak added.
Job openings have cooled over the last year. There were about 11.4 million job openings in July 2022 but 8.8 million openings this past July. That makes it the lowest number of monthly openings so far this year.
Hatzius also said at the NYU forum that "we've seen a very substantial rebalancing of the labor market." Powell also pointed out the rebalancing in his speech at the Jackson Hole Economic Symposium but said it "remains incomplete."
"That rebalancing of the labor market has taken place in a very painless kind of fashion via big declines in job openings, with very little increase in the unemployment rate, and very little decrease in employment relative to the labor force," Hatzius said.
A mixed outlook on the next 12 months
Hatzius said Goldman Sachs sees GDP growth at 1.9% next year while expecting only a 15% chance of a recession in the next 12 months. Hatzius said that the "drag from monetary policy tightening that operates via tighter financial conditions is largely in the past."
"We have seen clear evidence that inflation is moving down to the Fed's target, or strongly in the direction of the Fed's target, without a substantial deterioration in the real economy," Hatzius said. "We think the real economy is going to continue to perform reasonably solidly with some ups and downs."
He added that strong real disposable household income continues to grow, which will push the economy forward even more in the coming months.
Michelle Meyer, chief economist at Mastercard US, said at the NYU forum that the consumer "is taking back some of their power." Yet, "the consumer now is being a lot more mindful of how they are spending and engaging in the economy," Meyer said, as consumers don't have the same kind of excess savings they built up during the pandemic amid generous government stimulus.
"We're entering a period where consumers are returning to an environment where they're much more dependent on the path of the labor market, on the flow of income creation," Meyer said.
Still, major events that could hit the American consumer over the next few months will force the Fed to think carefully about its upcoming interest rate decisions and whether another hike is in the cards.
The most pressing is a federal government shutdown — Congress has just two weeks to reach an agreement to fund the government by September 30, and if it doesn't, a shutdown will happen. As Politico recently reported, a shutdown would prevent the Bureau of Labor Statistics from publishing inflation and unemployment data, leaving the Fed without the information it needs to determine economic progress.
Additionally, student-loan payments are resuming on October 1 after over three years on pause, and Hatzius said Goldman Sachs estimates the resumption will lead to a 0.2% hit in consumer spending. Goldman Sachs predicted those events could stunt economic growth — and complicate the Fed's job in the months to come.
Though a soft landing may be even more likely after the Fed's Wednesday decision, the Fed needs to hope for a not-too-hot economy and prices to stay relatively calm over the next few months.
Read the original article on Business Insider