America's first inflation crisis in decades, combined with the Federal Reserve's aggressive interest rate hikes to combat it, has made for a topsy-turvy past couple years on Main Street and Wall Street alike. It has weighed on consumers and kept investors constantly second-guessing themselves.
But some analysts say the Fed's influence on the economy isn't as profound as it used to be. Sure, markets will still react sharply when the Fed announces its new policy decisions, they say, but the lasting effects on stock prices and inflation are becoming increasingly stifled.
What's happening: After 18 months of a Fed-policy-induced rollercoaster ride, investors are ready for things to be boring again.
And the Fed is, too.
Fed Chair Jerome Powell hinted that the central bank was no longer controlling the inflation story during his speech at the Economic Club of New York last week, said Joe Brusuelas, RSM US chief economist.
That's a noted change in tone from March 2022 when the Fed ended its almost 15-year trend of maintaining low interest rates and introduced a series of aggressive rate hikes aimed at curbing historically high inflation.
For investors who were accustomed to near-zero rates, this was a major shift. It led to pronounced responses in the stock market and the broader economy.
But inflation has since reduced considerably, and there's no longer a need for such drastic measures.
The Fed, said Powell last week, is unwilling to make big moves and risk "unnecessary harm to the economy."
The market has already discounted the next Fed meeting, which begins on Halloween, as a "status quo policy update," said Brusuelas. In other words: Don't expect a rate hike this month. Financial markets currently see a nearly 99% chance the Fed will continue to pause rate increases in November, according to the CME FedWatch Tool.
Helping the Fed's cause: The 10-year Treasury yield has been hovering around 5% in recent days, its highest level since 2007. That rate influences consumer loans, including mortgages and credit cards, and is helping to weigh on consumer spending.
That means the Fed may not need to continue aggressively raising rates to bring spending — and inflation — down.
Inflation is starting to normalize: The US Consumer Price Index, a widely used measure of inflation, has decelerated significantly since it shot up above 9% in June 2022, although inflation has picked up again lately as volatile gas and food prices edge higher. But excluding food and energy, so-called core CPI stands at 4.1%, the lowest annual growth rate for that metric in two years, though still above the Fed's ultimate 2% target rate.
Some economists say that inflation is no longer considered an emergency issue. That means the Federal Reserve feels less pressure to quickly stabilize prices through aggressive, economically painful interest rate hikes.
"Once inflation gets down below 5%. It disappears from the headlines," Johns Hopkins economist and central bank scholar Laurence Ball previously told Before the Bell. "People go back to worrying about budget deficits or climate change or other public issues there are."
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