What to watch for at this week’s Federal Reserve meeting

Strong consumer spending can keep officials on their toes.

While the Fed is concerned with the possibility that higher market interest rates will weigh on the economy, they also face another potential challenge: economic data has remained surprisingly strong in recent months.

On one level, this is good news. Consumers are shopping and businesses are hiring rapidly despite higher interest rates, and that resilience has come at a time when inflation has declined substantially. The Fed’s favorite inflation gauge has fallen to 3.4 percent, down from 7.1 percent at its peak in summer 2022.

But if consumer spending remains so strong that companies feel they can raise prices without scaring away customers, that could make it difficult to fully reduce inflation to 2 percent.

That’s why policymakers at the Fed are keeping a close eye on the continued strength — and trying to decide whether it signals the need for further rate hikes.

Timing is a big question.

Officials may decide that they simply need more time to monitor economic trends.

Delaying further rate hikes in November — and possibly beyond — could give officials a chance to see if growth and consumer spending slow in the way that companies have warned it might.

Moreover, keeping interest rates on hold will give officials more time to see how looming geopolitical risks are developing. The war between Israel and Hamas could affect the economy in ways that are difficult to predict. If it escalates into a regional war, it could shake consumer confidence. But a broader conflict could also cause oil prices to rise, driving up inflation.

At the same time, officials may not want to completely rule out a future move at a time when market interest rates could fall, risks could fade and growth could remain rapid.

“Retaining optionality makes a lot of sense in the current context,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

Wall Street is divided on what will happen next. Investors see a one-in-four chance of a rate hike at the Fed’s last meeting in 2023. occurs on December 13. They see a slightly higher – but far from guaranteed – chance of a move in early 2024.

“Nobody has much confidence in the economic prospects right now,” Ms. Uruci said.