Wall Street closes lower after Fed Chair Powell says more hikes are ahead

Even though the Federal Reserve didn’t hike its benchmark interest rate on Wednesday, it didn’t lower it either.

So it remains at its highest level in 22 years.

Given that the Fed influences — directly or indirectly — interest rates on financial accounts and products throughout the US economy, that means savers and people with surplus cash still have many opportunities to get a far better return on their money than they’ve had in years — and even more importantly, a return that outpaces the latest readings on inflation.

Here are low-risk options to get the best yield on funds you plan to use within two years, and also on cash you expect to need within the next two to five years.

Read more here.

A press conference by Federal Reserve chairman Jerome Powell is displayed at the New York Stock Exchange today.

US stocks closed lower on Wednesday after the Federal Reserve announced it would keep interest rates steady but suggested that more hikes were on the horizon and that rates may remain higher for longer than previously expected.

Central bank officials said they would hold interest rates steady at their highest rate in 22 years but predicted in their “dot plot” that there would be at least one more hike this year and that cuts in rates wouldn’t begin until June of 2024, later than previously signaled. 

Markets struggled to find direction as Fed Chair Jerome Powell said in a press conference following the announcement that the Fed would “proceed carefully” in raising futures and that a recession remained a possibility.

Yields on the US 2-year Treasury yield soared to their highest levels since 2006 as investors worried about higher rates. 

Tech stocks also took a hammering as fears prevailed that growth stocks would be impeded by more hikes. 

Oil prices, meanwhile, sank 1% from previous highs as investors worried that a softening economy would limit energy demand. 

In corporate news, shares of Arm and Instacart, which both made their market debuts in recent days, pared back initial gains, down 4.1% and 10.7%, respectively. 

The Dow closed 77 points, or 0.2% lower on Wednesday.

The S&P 500 lost 0.9%.

The Nasdaq Composite was down 1.5%.

A slew of recent surveys indicate Americans are pessimistic about the economic outlook, even in spite of positive data. Similarly, polls also show Americans are displeased with President Joe Biden’s handling of the economy.

But their feelings about the economy may be somewhat tainted, Federal Reserve Chair Jerome Powell told reporters on Wednesday.

“I think a lot of it is — just people hate inflation,” he said, “and that causes people to say the economy is terrible.”

“At the same time, they are spending money and their behavior is not what you would expect from the surveys,” Powell said.

The latest University of Michigan consumer sentiment index showed Americans are becoming more anxious about the US economic outlook. The index hit an all-time low in June 2022, the same month that inflation, as measured by the Consumer Price Index, peaked at 9.1%.

Joanne Hsu, director of the university’s Surveys of Consumers, attributed last month’s decline to consumers sensing that rapid improvements in inflation they saw in prior months “have moderated.”

While someone with a long-term fixed-rate mortgage may be able to endure elevated interest rates, Americans living month-to-month off their credit cards likely find interest rates punitive, conceded Federal Reserve Chair Jerome Powell at a press conference on Wednesday.

But, he added, elevated inflation is worse for people on a fixed income than temporarily higher rates.

People without any meaningful savings who spend all their income on the basics of life (like clothing, food, transportation and heating) are in “trouble right away” if prices go up by 5%, said Powell. 

“It is for those people as much as anybody that we need to restore price stability. We want to do it as quickly as possible,” he said. “Obviously we would like the current trend to continue, which is that we are making progress without seeing the kind of increase in unemployment that we have seen in past hikes.”

But, he added, when the Fed raises rates, people who live on credit cards and borrowed money are going to feel the punch more than people with lots of savings.

People walk past the U.S. Capitol on September 11, 2023 in Washington, DC.

A looming government shutdown could not only serve as an economic headwind but also could limit the Federal Reserve’s ability to get key data, Fed Chair Jerome Powell said Wednesday.

But to what extent, Powell stayed mum.

“We don’t comment on government shutdowns,” Powell said. “It’s possible, if there is a government shutdown and it lasts through the next meeting [which concludes November 1], it’s possible we wouldn’t be getting some of the data that we would ordinarily get, and we would have to deal with that.”

Earlier in Wednesday’s press conference, Powell acknowledged a potential shutdown as part of a “long list” of factors that could affect Fed policy and the economy.

“It’s the strikes, it’s the government shutdown, resumption of student loan payments, higher long-term rates, oil price shock,” Powell said. “There are a lot of things that you can look at. So, what we try to do is assess all of them and handicap all of them.”

He added: “Ultimately, though, there is so much uncertainty around these things.”

U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, on September 20.

Federal Reserve Chair Jerome Powell indicated Wednesday that one or more rate hikes this year won’t make or break the economy.

“I wouldn’t attribute huge importance to one hike in macroeconomic terms,” said Powell. “Nonetheless, we need to get to a place where we’re confident that we have a stance that will bring inflation down to 2% over time.”

The Fed on Wednesday held interest rates steady for September and indicated that it could raise rates one more time this year, after hiking 11 times since last March to tamp down skyrocketing prices.

Powell reiterated the Fed’s 2% inflation target during his post-policy meeting press conference.

While inflation has come down dramatically since last year, it still remains stubbornly above that goal.

The Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, rose 3.3% annually in July. The core PCE index gained 4.2% for the 12 months ended that same month.

US Federal Reserve Chairman Jerome Powell holds a press conference in Washington, DC, on September 20.

Markets have been eagerly looking for signs of interest cuts, cleaving to every word Federal Reserve Chair Jerome Powell says — even if Powell says his predictions should be taken with a grain of salt.

Powell appeared to give rate cuts a subtle thumbs-up at the last meeting.

At first, he said, “we’d be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year, I don’t think.” Then he implied cuts could come next year saying that “many people” penciled it in.

On Wednesday, Powell effectively tried to walk back those comments saying that when he answers “hypothetical” questions about cutting he “never” intends to “send a signal about timing.”

“I’m just answering them as the question is expressed,” Powell told reporters on Wednesday.

The Fed’s Summary of Economic Projections shows Fed officials believe there’ll be at least two rate cuts next year. In June, they were projecting four rate cuts.

United Auto Workers members attend a rally in Detroit on September 15.

The Federal Reserve has a tough job making sense of America’s economic data and predicting the future on a good day. Add a United Auto Workers strike, oil prices nearing $100 a barrel, gas prices hitting $4 in 11 states and the possibility of a government shutdown … and that makes for a very tricky job for Fed economists.

“Forecasting is very difficult,” Federal Reserve Chair Jerome Powell conceded in a press conference Wednesday. “Forecasters are a humble lot, with much to be humble about.”

In particular, Powell said the wrenches thrown into the economy’s gears make forecasting even more difficult.

“Ultimately, though, there is so much uncertainty around these things,” he said.

UAW strike

Powell declined to comment on the politics of the strike. But he said among the many unknowns are the effect on America’s economic output, hiring and its impact on inflation.

“That’s going to depend on how broad it is and how long it’s sustained for, and it also depends how quickly they can make up for lost production,” Powell said. “So none of those things are known now. It’s very, very hard to know.”

Oil prices

On energy prices, Powell said “that is a significant thing” for consumers and the economy.

“Energy prices being up can affect spending,” he said. “A sustained period of higher energy prices can affect consumer expectations about inflation.”

Shutdown

On the threat of a government shutdown, Powell also declined to comment on the politics but said it’s hard to say in advance how it might affect the economy.

“It would depend on all kinds of factors I don’t know about now, but it’s certainly a reality that that’s a possibility,” Powell noted.

Markets stumbled on Wednesday afternoon after Federal Reserve Chair Jerome Powell said that a soft landing, where the US economy avoids a recession but successfully lowers inflation, was not a “baseline expectation” for central bank officials.

“I’ve always thought that the soft landing was a plausible outcome, that there was a path to a soft landing,” he said during a press conference. “Ultimately, this may be decided by factors that are outside of our control.”

It is possible to avoid recession, said Powell, but stressed that restoring price stability is the Fed’s top priority.

While a soft landing “is the end we are trying to achieve,” he said, “I wouldn’t want to handicap the likelihood of it.” 

Still, he reiterated that “a soft landing is a primary objective,” and “what we have been trying to achieve for all of this time.”

The Dow was 120 points, or 0.4% higher on Wednesday afternoon.

The S&P was 0.2% lower.

The Nasdaq was down 0.4%.

US Federal Reserve Chairman Jerome Powell holds a press conference in Washington, DC, on September 20, 2023. The US Federal Reserve voted Wednesday to keep interest rates at a 22-year high, between 5.25 percent and 5.50 percent while forecasting an additional rate hike before the end of the year to bring down inflation.

Federal Reserve Chair Jerome Powell is trying to have his cake and eat it too.

In his post-meeting press conference Wednesday he was careful not to give the impression that the Fed is done hiking interest rates, saying, “We’re prepared to raise rates further if appropriate.”

But later he said, “The fact that we decided to maintain the policy rate of this meeting doesn’t mean that we’ve decided that we have or have not, at this time reached that stance of monetary policy that we’re seeking.”

Powell told reporters on Wednesday that forthcoming economic data will inform the central bank’s decisions.

As it stands, inflation remains above the Fed’s 2% target.

U.S. Federal Reserve Chairman Jerome Powell speaks during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington on September 20.

The Federal Reserve’s latest policy statement outlining officials’ decision to hold interest rates steady characterized the job market and economic growth differently.

In the latest statement, released Wednesday, Fed officials noted that “economic activity has been expanding at a solid pace,” compared with a “moderate” pace noted in the previous statement. Fed Chair Jerome Powell has previously said the central bank wants to see “below-trend growth,” so stronger-than-expected growth might not be a good thing since it means there’s some persistent upward pressure on prices.

The latest statement also said “job gains have slowed in recent months,” compared with job growth being described as “robust” in the July policy statement. The Fed could be perceiving that development in a positive light since Powell usually stresses that the central bank wants to see the labor market come into better balance in order to defeat inflation.

The language in the rest of the policy statement remained the same.

People make their way near the Stock Exchange in New York City on June 14.

Here’s what Wall Street has to say about the Federal Reserve’s decision to hold interest rates steady in September, and its latest economic projections that signal fewer rate cuts next year than previously expected.

US Federal Reserve Chairman Jerome Powell during a press conference today in Washington, DC.

The Federal Reserve’s latest set of economic projections showed that most central bank officials now expect fewer rates cuts next year than they estimated in June.

In the previous projections, most officials expected that the central bank’s benchmark lending rate would top out at a range of 4.38-4.62% in 2024. In Wednesday’s updated estimates, most officials now expect the Fed’s key interest rate to end up somewhere between 4.88 and 5.62%. That indicates fewer rate cuts and that rates could remain elevated for longer than previously expected.

The Fed won’t unnecessarily keep rates at a specific level, but it does want to see inflation come under control before cutting rates.

A sharp economic downturn jacking up unemployment could also prompt the Fed to cut rates, since it also has a mandate to ensure maximum employment.

The Federal Reserve anticipates that interest rates will remain higher for longer but also expects a stronger economy, lower unemployment and for inflation to hit its target 2% by 2026, according to the central bank’s latest economic projections, released Wednesday.

The Summary of Economic Projections, a consensus of Fed officials’ assumptions for monetary policy and economic conditions, showed that most members now expect fewer rates cuts next year than they estimated in June.

In Wednesday’s updated estimates, most officials now expect the Fed’s key interest rate to end up somewhere between 4.88% and 5.62% in 2024, versus topping out in the range of 4.38% and 4.62% next year. That indicates fewer rate cuts and that rates could remain elevated for longer than previously expected.

Still, Fed officials have a rosier outlook for the US economy. Median projections for GDP growth this year and 2024 were revised up to 2.1% and 1.5%, respectively, from the expectations of 1% and 1.1% in June. A resilient labor market has helped fuel consumer spending, which has kept the economy churning.

As for the jobs market, Fed officials anticipate the unemployment level won’t be as high as previously expected. The median unemployment rate projections were revised down to 3.8% this year and to 4.1% in both 2024 and 2025. In June, Fed officials projected unemployment rates of 4.1% for this year and 4.5% for the next two years.

Inflation projections held somewhat in line to what the Fed laid out in June. Updated median expectations show the core Personal Consumption Expenditures index, the Fed’s preferred gauge, up 3.7% for this year, 2.6% for 2024, 2.3% for 2025 and 2% for 2026. September’s projections are the first to include 2026.

Markets gave up earlier gains Wednesday afternoon after the Federal Reserve kept interest rates steady but indicated it would hike once more before the end of the year and keep rates higher for longer than previously expected.

The Dow was 115 points, or 0.3% higher, the S&P 500 was down 0.1% and the tech-heavy Nasdaq dropped 0.4%.

The Fed hiked interest rates to their highest level in 22 years in July and have held them there since. Before Wednesday’s announcement, traders saw a 72% chance that rates will remain the same at the November policy meeting. That certainty has since fallen to 66%.

The price of oil, meanwhile, fell further from recent highs after the announcement as traders reassess US demand for energy amongst heightened interest rates.

In corporate news, shares of recently IPO’d Arm and Instacart both pared back recent gains, down 2.8% and 6.5%, respectively.

The Federal Reserve said Wednesday it will pause its rate hikes, keeping its benchmark lending rate at a 22-year high.

The move was widely expected, after the central bank signaled in recent weeks that it intended to wait for more data to understand how previous rate hikes are affecting the US economy. 

Since March 2022, the Fed has lifted interest rates 11 times and held them steady twice, including September’s pause.

The Federal Reserve sets monetary policy with two goals in mind: price stability and maximum employment. Those two objectives are often referred to as the Fed’s “dual mandate.”

That dual mandate is relatively unique compared to many other central banks around the world. The Bank of England, Bank of Japan and European Central Bank are only charged with focusing on maintaining price stability, for example. That means that, unlike the Fed, those other central banks have just one job right now: to bring inflation down to 2%.

So why does the Fed also focus on promoting maximum employment?

The Fed’s dual mandate dates to the 1970s, when the United States was experiencing stagflation, which occurs when the economy faces both high inflation and high unemployment at the same time. In an attempt to tackle the issue, Congress amended the Federal Reserve Act in 1977, enacting some reforms to the central bank and officially giving the Fed its dual mandate.

Since then, the Fed has focused not only on keeping prices in check but also on maintaining “the highest level of employment that the economy can sustain over time,” according to a St. Louis Fed blog post.        

Economists debate whether the Fed will achieve a “soft landing” as the Fed battles persistent inflation. Based on the Fed’s two priorities, a soft landing would be achieved if the central bank successfully tamps down inflation without causing a spike in unemployment or a broader recession.

“We’re concerned number one with restoring price stability,” Powell said. “In the long run, that’s something we have to do so that we can have the kind of economy we really want, which is one with a sustained period of tight labor market conditions.”

Mortgage rates have spiked during the Fed’s historic inflation-curbing campaign, sending home affordability to its lowest level in several decades. Buying a home is more expensive because of the added cost of financing the mortgage and rising home prices.

The inventory of existing homes has dramatically declined as homeowners who previously locked in lower rates are reluctant to sell. The combination of low inventory and high costs has squeezed would-be homebuyers and sent overall home sales way down.

The Fed is expected to hold its rates steady at September’s meeting and has already tightened policy significantly, said Danielle Hale, chief economist at Realtor.com, in a statement in advance the Fed’s meeting.

The Fed’s outlook for the rest of the year — whether another hike will be needed and how long policy will need to remain restrictive — will make the most impact on mortgage rates.

“Already, the impact of tighter policy is acutely felt,” she said. “Mortgage rates have steadied just below recent highs, but remain more than 3 percentage points above their pandemic-era lows.”

The combined impact of higher rates and higher home prices has driven up the monthly cost of financing the typical listed home by more than $400, or 22.5%, from a year ago, and up more than $1,100 from August 2020, doubling the cost in three years, according to Realtor.com.

Despite growing divisions among Federal Reserve officials regarding future monetary policy decisions, all members voted in favor of holding interest rates steady.

Fed officials have made unanimous decisions at every meeting since July 2022. At the prior meeting, in June, Esther George, the former President of the Kansas City Fed, voted for a half point hike while all other Fed officials voted for a three-quarter point hike.

The Fed’s minutes, which are due on October 11, could hint at potential division at the next meeting, which is set to take place on October 31 to November 1.

The Dow climbed nearly 250 points, or 0.7%, early Wednesday afternoon as investors await a key interest rate policy decision from the Federal Reserve.

The S&P 500 was trading 0.3% higher and the tech-heavy Nasdaq was down 0.1%.

The central bank is expected to hold interest rates steady at its 2pm policy announcement: Traders see a 99% chance that the Fed will keep rates unchanged, according to the CME FedWatch Tool.

But Wall Street is less certain about future meetings, with traders seeing a 72% chance that rates will remain the same at the November policy meeting. They will pay close attention to the Fed’s “dot plot” where officials predict the path of rate hikes and inflation going forward and Fed Chair Jerome Powell’s press conference for clues about what comes next.

Treasury yields, meanwhile, fell after reaching their highest level since 2007 on Tuesday. Oil prices also retreated from recent highs as traders await the Fed decision, in order to reassess energy demand going forward.

In corporate news, shares of Stellantis were up nearly 3% after the automaker announced that UAW strikes could lead to more than 300 layoffs at its plants in Ohio and Indiana.

General view of Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia in May 2018.

Goldman Sachs ramped up its oil price forecasts on Wednesday, predicting Saudi Arabia’s aggressive supply cuts will lift crude into triple-digit territory.

The Wall Street now sees Brent crude, the international benchmark, averaging $100 a barrel a year from now. That’s up from $93 a barrel previously and current prices of around $94.

The forecast suggests drivers may not get any relief from high gas prices anytime soon. Lifted by a 30% surge for oil, gasoline prices have climbed to 2023 highs in recent days. Drivers in 11 states are now paying an average of $4 a gallon or higher, according to AAA.

“Significantly lower OPEC supply and higher demand more than offset significantly higher US supply,” Goldman Sachs strategists wrote in a note to clients, adding that OPEC will be able to exercise its “pricing power assertively.”

Goldman Sachs cut its 2024 average OPEC supply forecast by 900,000 barrels per day, predicting that Saudi Arabia will only “gradually” unwind its supply cuts starting in the second quarter of next year.

“Saudi Arabia appears determined to lower inventories,” the bank’s strategists said.

The good news is that Goldman Sachs argues “most of the rally is behind us” and Brent is “unlikely to sustainably exceed $105” a barrel next year.

That’s because far higher prices would incentivize more drilling by US frackers and could hurt demand.

“OPEC is unlikely to push prices to extreme levels, which would destroy its long-term residual demand,” Goldman Sachs wrote.

The bad news is that the bank says oil prices are unlikely to “sustainably drop” below $80 a barrel because of the OPEC supply cuts and shrinking emergency stockpiles in the United States.

People walk and shop in a lower Manhattan shopping mall on September 13 in New York City. 

American shoppers are keeping the US economy afloat.

Consumer spending – the main driver of growth – is still “elevated,” according to Alastair Borthwick, Bank of America’s chief financial officer.

After booming previously, spending has slowed to more “normal” levels as Fed rate hikes have the “desired effect,” Borthwick said Wednesday at a conference.

“It’s difficult to see a US recession when the consumer is spending 4% year-over-year,” he said. “The consumer is still in very good shape.”

Workers walk past a reflection of the Bank of England on May 11 in London, England. 

While all eyes may be on the Federal Reserve today, they’ll quickly shift to other central banks across the globe who are also meeting this week.

The Bank of England is set to meet on Thursday. The UK’s Consumer Price Index reading came in on Wednesday much cooler than expected, leaving investors to believe a pause is now a more plausible scenario than another rate hike. At the BoE’s last meeting, in August, it raised interest rates by a quarter point.

Also on Thursday the Bank of Japan is set to announce its decision on interest rates. In contrast to the United States and Europe, Japan’s central bank is expected to keep interest rates low to stimulate the economy.

Other central banks meeting this week include the Swiss National Bank, the South African Reserve Bank, Norway’s Norges Bank and the Central Bank of Brazil.

A trader works on the floor of the New York Stock Exchange on Wednesday, Sept. 13.

US stocks opened higher Wednesday morning as oil prices eased ahead of the Federal Reserve’s interest rate decision this afternoon.

Fed officials are widely expected to hold interest rates steady at their 2pm policy announcement, and investors will pay close attention to the Summary of Economic Projections, which signals the projected path of rate hikes and inflation. They’ll also watch Fed Chair Jerome Powell’s press conference for clues about the Fed’s way forward.

Oil prices, meanwhile, eased off of recent highs on Wednesday. Crude fell by about 1% ahead of the Fed decision as traders reassess when interest rates will hit their peak and what that means for energy demand in the United States.

In corporate news, shares of Instacart fell by 3.7% just one day after the company’s public debut. The stock opened on Tuesday at $42 after pricing at $30 per share.

Shares of Pinterest spiked 5.8% after the company raised forward guidance for the year during its investor day.

The Dow was 125 points, or 0.4%, higher on Wednesday morning.

The S&P 500 was up 0.4%.

The Nasdaq Composite also gained 0.4%.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on July 26 at the Federal Reserve in Washington, DC.

The Federal Reserve’s “dot plot” and Chair Jerome Powell’s post-meeting press conference will be the main focus for investors on Wednesday, said Sam Millette, fixed income strategist at Commonwealth Financial Network.

The Summary of Economic Projections, or dot plot, is released on a quarterly basis.

“These aggregated expectations from central bankers are worth monitoring, given the impact that they can have on markets and the guidance that they can provide to investors,” said Millette.

“The median dot plot projection currently calls for one additional 25 basis point rate hike through the end of 2023 followed by four 25 basis point cuts in 2024, and any changes to these projections have the potential to cause uncertainty and potential volatility for markets.”

However, the most likely result for this meeting is “no immediate change in the current path of monetary policy,” Millette said, though traders will be listening closely to Powell for any hint of a future rate hike.

At any given moment, if you want to know what the Federal Reserve is most likely to do at any of its meetings through the end of 2024, you can head to the Chicago Mercantile Exchange Group’s FedWatch Tool page. 

There, you will find a bar chart plotting the share of traders predicting a rate hike, cut or no change in interest rates at an upcoming meeting. These traders don’t have a secret ear into the Fed’s private meetings nor a crystal ball, and yet their consensus predictions have a tremendous track record. 

Perhaps that’s also because Fed Chair Jerome Powell, who has made it a point not to surprise markets with monetary policy decisions, most likely keeps tabs on the CME Group’s FedWatch Tool, too.  

“We don’t go out of our way to surprise markets or the public,” Powell said at the Fed’s June press conference following the decision to pause interest rates for the first time since raising rates at each meeting since March 2022.

But how exactly does it all work? 

Read more here.

Traders work on the floor of the New York Stock Exchange on Wall Street on August 22.

US stock futures rose Wednesday morning as Wall Street awaits the Federal Reserve’s latest policy decision.

Stocks declined Tuesday, and the 10-year Treasury yield rose to 4.37%, its highest level since October 2007, as investors worried the central bank will keep rates higher for longer.

Oil prices remained elevated, putting more pressure on stocks. Brent crude, the global benchmark, rose to roughly $95 a barrel. 

US housing starts fell to their lowest level since June 2020, well below economists’ expectations, while home building slumped 11.3% in August from July, according to fresh data from the Census Bureau.

Automaker stocks gained after the striking United Auto Workers said that it could add more workers to its effort if more progress isn’t made in negotiations with the Big Three. Stellantis shares added 1.5%, General Motors rose 1.9% and Ford rose 1.8%.

As the US national debt passes $33 trillion and a government shutdown looms, Wall Street feels defensive.

That shutdown could sour sentiment and deal a blow to an economy already dealing with high gas prices, autoworker strikes and elevated inflation — with some saying it could even increase the possibility of a recession.

Political finger-pointing around what caused the accelerated debt accrual, meanwhile, has left the government at an impasse around the budget.

The budget deficit — the difference between what the government spends and what it takes in — reached $1.5 trillion for the first 11 months of the fiscal year, an increase of 61% since last year.

The recent increase in interest rates has already made it much more expensive for the government to pay back what it owes. And a shuttered government, without a plan for how to pay down its debt, would make the problem worse.

Republicans say federal spending programs championed by the Biden administration are too expensive, and Democrats say GOP-backed tax cuts have squashed revenue.

September 30 marks the end of the fiscal year, and lawmakers will have to finalize a 2024 budget deal by October 1 to avoid a government shutdown. But not one of the 12 appropriation bills required to fund the government has passed through Congress yet, making it unlikely that a plan will be passed by the deadline.

The threat of a shutdown comes as the US economy is already feeling the pressure of inflation, interest rate hikes and a high deficit, UAW strikes, renewed student debt payments and rising gas prices, said Gary Schlossberg and Jennifer Timmerman at the Wells Fargo Investment Institute.

Each of those things, they said, “weighs on housing, consumer finances and government financing expenses in adding to recession risks during the closing months of the year.”

A government shutdown would stop most government agency activities and services and require all nonessential government personnel to take unpaid leave. Analysts at EY estimate that there are about 800,000 non-emergency federal workers with an average salary of $95,000 each.

The extent of the damage comes down to how long a potential shutdown lasts.

Each week of a government shutdown, estimated Gregory Daco, EY chief economist, and his team, would cost the US economy $6 billion and shave GDP growth by 0.1 percentage points in the fourth quarter of 2023.

The shutdown would also lead to a delay in economic data, said Daco, “creating a potential headache for economists and policymakers trying to assess the economy’s health.”

Shutdowns over the past 30 years have lasted between a few days and over a month, but Schlossberg and Timmerman believe that given the “hardened positions in an increasingly polarized Congress,” this one has the potential to last a few weeks.

U.S. Federal Reserve Board Chairman Jerome Powell arrives to a news conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, on July 26.

The Federal Reserve is expected to announce Wednesday that it is hitting pause on its rate-hiking campaign in order to parse more data and understand how previous rate hikes are affecting the US economy.

There seems to be a consensus among Fed officials that holding rates steady this month is the right move — but some have said the Fed could raise rates again after September.

Financial markets currently see a 69% chance the Fed will continue to pause rate increases in November, according to the CME FedWatch Tool.

Inflation and the job market have both slowed steadily in the past year, giving the Fed enough room to hold rates steady and wait for more data to come in. Despite ongoing volatility in energy markets, inflation is also expected to keep slowing in the coming months, mostly due to easing car prices and rents. All together, those factors give officials enough reassurance that they can pause rate hikes without risking a resurgence in price increases.

“There is nothing that is saying we need to do anything imminent anytime soon,” Fed Governor Christopher Waller told CNBC earlier this month, before the latest Consumer Price Index showed higher gas prices helped push up headline inflation in August. “We can just sit there and wait for the data.”

The last time central bank officials decided to hold rates steady was in June, as uncertainty spiraled over how the extent to which the spring banking crisis would constrain lending. When it became clear the economy was not being hammered by that turbulence, the Fed raised rates again in July.

Some economists and Fed officials argue that the central bank has already raised rates high enough to eventually constrain the economy and bring inflation down to the Fed’s stated target of 2%.

“We’ve gotten monetary policy in a very good place,” New York Fed President John Williams told Bloomberg earlier this month.

But even though the Fed is reassured by inflation’s steady slowdown — and the outlook — the central bank is still facing a number of uncertainties on the horizon.

In addition to its rate announcement on Wednesday, the Fed is also set to release a fresh set of economic projections.

That forecast will likely reflect stronger economic growth and slightly lower unemployment this year, compared with previous estimates.

Officially named the Summary of Economic Projections, it’s also known as the dot plot, since it includes a chart that plots out an array of dots, showing where each of the Fed’s 19 leaders expect interest rates to go in the future.

Former Fed chair Ben Bernanke first created the dot plot in 2012, mostly as a way to assure the public that Fed leaders planned to keep interest rates low for the time being. 

Federal Reserve Chair Jerome Powell has warned that “the dots are not a great forecaster of future rate moves,” and that they should be taken “with a big, big grain of salt.” 

But that doesn’t stop investors from reading into them.

The U.S. Capitol Building is seen in Washington, D.C., on August 15.

With a spending deadline at the end of the month, House Republicans have struggled to reach a consensus on a defense spending bill and are now are moving ahead with a plan to temporarily fund the government. Meanwhile, some Republicans are threatening to ouster House Speaker Kevin McCarthy if he doesn’t acquiesce to their demands. The political stalemate is expected to lead to a lapse in funding for the government.

In the event of a shutdown, the Bureau of Labor Statistics says it will stop releasing data, including key figures on inflation and unemployment.

That lack of crucial government data would make it even more difficult for investors and the Federal Reserve to interpret the US economy, creating the potential for policy missteps.

“If, for argument’s sake, the Fed overestimates the strength of the real economy and raises rates further in November — because of delayed downward revisions to July and August data, and delayed access to weaker September and October data — investors, businesses, and households could incur unnecessary costs and risks,” said Julia Pollak, chief economist at ZipRecruiter.

“By the time the Fed discovered its mistake, the effects of excessive monetary tightening could be difficult to reverse,” she said.

It’s unclear whether the Fed would hold rates steady in the absence of government data or how it would navigate a government shutdown when deliberating monetary policy. The effects of a government shutdown also depend on how long it lasts, which also isn’t clear at this point.

Greg Valliere, chief US policy strategist at AGF Investments, said Tuesday he now sees a 70% chance of a government shutdown. The potential shutdown could be a “long one lasting into the winter,” Valliere wrote in a note. 

United Auto Workers from engine team 50 man the picket line outside the Stellantis Toledo Assembly Complex on Monday, Sept. 18 in Toledo, Ohio.

As the United Auto Workers strike against Ford, GM and Stellantis heads into its sixth day, it could become a headache for the Federal Reserve, mostly because of what the strike reflects about the labor market, rather than the possible economic impact.

“The Fed is thinking the UAW strike is just another sign that the labor market remains relatively tight,” said Andrew Patterson, senior international economist at Vanguard. 

“They think that when you start to see these strikes — like we saw with the railroads for example — that they’re a sign of relative strength in the labor market, so workers feel they can go on strike.”

A fuel dispenser at a gas station in La Puente, California, on September 7.

Rising energy prices, which have pushed up the cost of gas in recent weeks, could be a wild card for Federal Reserve officials. The national average for regular gas is currently $3.88 a gallon, the highest price since October 2022, according to AAA.

In theory, elevated energy prices could feed into core inflation — which Fed officials are more focused on — if those prices stay high for long enough, jacking up the prices of airfares and freight. More importantly, it could affect inflation expectations.

“The Fed is obviously most focused on core, but they’re not going to ignore what’s going on with energy prices, particularly if the higher gasoline prices begin to affect inflation expectations and wage demands, which is a real possibility,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.

However, some argue that higher energy prices could help the Fed tame inflation.

Morgan Stanley economists found in a recent analysis that energy price shocks have just a “small” impact on core inflation but tend to take a “sizable bite out of” consumer spending. 

The bank said that for the Fed, the recent rally in oil prices “could be a blessing in disguise.”

“That could absolutely be the case,” said Kristina Hooper, chief global market strategist at Invesco.

“Higher gas prices would help dampen consumer spending and that’s what the Fed needs — the consumer has been driving this economy and keeping it strong.”

— CNN’s Matt Egan contributed to this report.

President Joe Biden arrives at the White House, Sunday, Sept. 17 in Washington.

President Joe Biden has singlehandedly reshaped the Federal Reserve Board of Governors during his presidency.

By law, the US president nominates who gets to serve on the seven-member board, which includes the chair and two vice chairs. The US Senate has confirmed four of his nominees, most recently economist Adriana Kugler for a term ending in 2026. Biden’s nomination of Philip Jefferson to be elevated to vice chair and a full term for Lisa Cook were also approved by the Senate.

Three of Biden’s picks for the Fed’s Board of Governors are people of color, keeping with his promise of elevating racial minorities to key government posts. Jefferson is the second Black person to be vice chair in the Fed’s history, Cook is the first Black woman to serve on the board, and Kugler is the first Hispanic person to be a Fed governor.

Fed Vice Chair for Supervision Michael Barr and Jefferson are perhaps the most centrist Fed officials among Biden’s picks, with Cook backing a more dovish stance on fighting inflation, or one that seeks to avoid inflicting unnecessary damage to the economy through rate hikes.

Economists expect Kugler to be in the dovish camp, though in her Senate confirmation hearing she acknowledged that the Fed should focus more on the central bank’s price stability mandate.

Investors looking ahead to the next phase of the Fed’s strategy are now asking themselves how much longer will rates stay this high. But inflation’s uncertain path makes that a tough question.

“Rather than arguing about the peak rate, of how many more rate increases do there need to be, what we should probably start thinking about is how long does this last, that you’re going to be at these elevated rates,” Federal Reserve Bank of Chicago President Austan Goolsbee said earlier this month.

Some investors are betting on rate cuts as soon as early next year, perhaps on expectations that the economy might soon deteriorate. If unemployment spikes because of higher interest rates, for example, the Fed would likely cut rates to stem job losses under its mandate of maximum employment.

However, the Fed hasn’t given any hint of rate cuts just yet. In fact, according to minutes from its last meeting, in July, quite the opposite seems likely: more rate hikes this year.

Rate cuts would mean the Fed is looking to boost an economy that’s not doing well enough to promote full employment. In contrast, the Fed’s suggestion of rate hikes implies officials see the US economy is still running too hot and might not be consistent with 2% inflation.

In addition to the possibility of cutting rates because of an economic downturn, the Fed could also cut rates if inflation slows too much.

“If the Fed sees that inflation goes below the 2% target, they could start decreasing interest rates, but I don’t think they are going to start decreasing interest rates until that happens,” said Eugenio Alemán, chief economist at Raymond James.

And even if and when the cuts do begin, it’s unlikely the Fed would return to ultra-low interest rates, economists say.