Wed. Sep 20th, 2023
    U.S. Federal Reserve Faces New Risks as Autoworkers Strike, Government Shutdown, and Student Loan Repayments Loom

    U.S. Federal Reserve officials are meeting this week to discuss the possibility of controlling inflation without a recession. However, they now face new risks that could jeopardize this best-case scenario. With an ongoing autoworkers strike, a potential federal government shutdown, and the resumption of student loan repayments, the short-term risks have become more uncertain.

    The United Auto Workers initiated a strike against all major automakers, with the numbers of striking employees expected to increase. Meanwhile, federal agencies face closure if a deal is not reached by the end of the month, and negotiations are currently being hindered by congressional Republicans. Additionally, student loan repayments, which had been suspended during the COVID-19 pandemic, are set to restart in October.

    While these individual events may not significantly alter policymakers’ perception of the short-term risks, prolonged disruptions in the auto industry and federal agencies could have far-reaching consequences. These disruptions may dampen consumer spending, potentially leading to an increase in car prices and undermining the Fed’s efforts to control inflation. They could also negatively impact business and consumer confidence, potentially tipping the economy into a downturn rather than a soft landing.

    Economists at Goldman Sachs have warned of a potential “pothole” in the fourth quarter of the year, as consumers face the renewal of student loan payments. This could divert funds from other spending and potentially reduce gross domestic product (GDP) growth by more than a percentage point.

    With interest rate hikes, credit tightening by banks, and the depletion of pandemic-era savings, the economy is vulnerable and could easily be derailed. Furthermore, as the Federal Reserve reduces its balance sheet, unexpected tightening of financial conditions may pose an additional risk.

    The Federal Reserve is expected to maintain its policy rate at the current level during its upcoming meeting. However, any emerging risks may influence the discourse and atmosphere around the meeting. As central bankers have refrained from providing explicit guidance on future decisions, it remains uncertain whether they will indicate when interest rates may be cut.

    While recent economic data has generally supported the Fed’s goals, with inflation decreasing and the economy growing above trend, potential shutdowns in the auto industry and federal agencies could erode growth and confidence throughout the economy. These factors could lead to a slowdown that may have a lasting impact on consumer behavior and economic growth.

    – Reuters- WASHINGTON, Sept 18 (Reuters) – U.S. Federal Reserve officials, who have tentatively embraced the possibility they can squelch inflation without a recession…
    – Reuters Graphics