The Federal Reserve Hits Pause

Happy Thursday! To all of you in and around Des Moines, Iowa: Tonight’s the night! Steve, Declan, and Andrew are excited to see you at Twisted Vine Brewery, where there will be drinks on us for the first hour and a half, socializing with other members, and an hourlong Q&A with the Dispatchers. So bring your questions—and your friends!  

Quick Hits: Today’s Top Stories

• Ukrainian President Volodymyr Zelensky criticized the United Nations during a speech to the U.N. Security Council Wednesday, saying the body had not fulfilled its remit of solving world conflicts. Zelensky argued that Russia should be stripped of its veto power on the council and called on the U.N. to back Ukraine’s 10-point peace plan, which Moscow has rejected. “Ukrainian soldiers are doing with their blood what the U.N. Security Council should do by its voting,” Zelensky said. “Veto power in the hands of the aggressor is what has pushed the U.N. into deadlock.” Zelensky will be in Washington today, where he’s set to meet with President Joe Biden at the White House, address senators on Capitol Hill, and make his first visit to the Pentagon to speak with U.S. military leaders, including Defense Secretary Lloyd Austin. He will meet privately with House Speaker Kevin McCarthy but will not address the House of Representatives.  
• President Joe Biden met with Israeli Prime Minister Benjamin Netanyahu in New York City Wednesday, on the sidelines of the U.N. General Assembly gathering. It’s the first time the two have met since Netanyahu took office in December and comes after months of heightened tensions between the two leaders over the Netanyahu government’s attempts to reform Israel’s judicial system. “Today, we’re going to discuss some of the hard issues, that is upholding democratic values that lie at the heart of our partnership, including the checks and balances in our systems and preserving the path to a negotiated two-state solution, and ensuring that Iran never, never acquires a nuclear weapon,” Biden said. 
• Armenian separatists and the Azerbaijani government reportedly agreed on Wednesday to a ceasefire in Nagorno-Karabakh—an ethnically Armenian breakaway region which technically belongs to Azerbaijan. The Russian defense ministry—an Armenian ally—reportedly negotiated the agreement, which ended the Azerbaijani military onslaught on the unrecognized state that began Tuesday and killed at least 32 people and injured some 200 more. Azerbaijani government officials say the deal will bring Nagorno-Karabakh fully under the regime’s control, dissolving the region’s army and handing over military hardware ahead of “reintegration talks” between Azerbaijan’s government and the separatists. 
• Central bankers at the Federal Reserve held interest rates steady following their meeting this week, maintaining a 5.25 percent and 5.5 percent rate as they did in June. The Fed’s quarterly projection for 2024 has rates remaining tight and inflation returning to its 2 percent target in 2026. 
• The Biden administration on Wednesday announced the creation of American Climate Corps, a job training program aimed at preparing as many as 20,000 young people to enter professions in “clean energy, conservation, and climate resilience related skills.” Participants in the program—which harkens back to New Deal-era work schemes—will be paid.  
• Hunter Biden, the president’s son, plans to plead “not guilty” to three felony charges related to his alleged illegal possession of a revolver, according to a court filing Tuesday. The younger Biden had also requested that his first court appearance be made virtually, but U.S. Magistrate Judge Christopher J. Burke said Wednesday that Biden, who lives in California, must appear in person in the federal Delaware courtroom on September 26, because “any other defendant would be required to attend his or her initial appearance in person. So too here.” 
• In testimony before the House Judiciary Committee Wednesday as part of routine oversight, Attorney General Merrick Garland defended his department’s handling of the investigation into Hunter Biden and maintained neither he nor the White House had interfered in those proceedings. “I’m going to say again, and again, if necessary, I did not interfere with, did not investigate, did not make determinations” in the Hunter Biden probe, Garland said.  
• The Senate voted 83-11 Wednesday to confirm Air Force Gen. Charles Q. Brown Jr. as the next chairman of the Joint Chiefs of Staff to replace the outgoing chairman, Gen. Mark Milley, who is retiring at the end of the month. Republican Sen. Tommy Tuberville of Alabama has blocked the mass promotions—objecting during a process called unanimous consent—of some 300 other military officers over the Defense Department’s abortion policy. Senate Majority Leader Chuck Schumer had been reluctant to hold the vote for fear of seeming to appease Tuberville and in hopes that the Republican senator would back down. Votes to confirm Marine Corps Gen. Eric M. Smith and Army Gen. Randy George to lead their respective services will likely follow Thursday, circumventing Tuberville’s hold—a move Tuberville himself has called for. 
• Former White House aide Cassidy Hutchinson says Rudy Giuliani, the former mayor of New York City and lawyer to former President Donald Trump, groped her on January 6, 2021, while she and Giuliani were both backstage at Trump’s White House Ellipse speech. She makes the claim in her forthcoming memoir and joins a former Giuliani employee in accusing the onetime presidential candidate of improper sexual behavior. Giuliani denies the allegations from both women.  
• Kari Lake, the failed Arizona gubernatorial candidate and close ally of former President Donald Trump, is reportedly set to launch a bid for Senate in October. Independent Kyrsten Sinema has not said whether she’ll run for reelection, and Rep. Ruben Gallego is seeking the Democratic nomination. 

A (Sort of) Hawkish Pause

Federal Reserve Chair Jerome Powell sported his usual purple tie at the central bank’s September meeting Wednesday. Powell has worn a purple tie at five of the six Federal Open Market Committee (FOMC) meetings so far this year, throwing a curveball in March with an icy blue number. His wardrobe consistency has frustrated attempts by monetary policy nerds to read dovish or hawkish cues into the chair’s dress. Your Morning Dispatch editors’ preferred interpretation is that the purple represents a throwback to the garb of ancient Roman senators. (That’s how often we think about the Roman Empire.)

Imperial colors notwithstanding, the central bank paused its rate-hiking campaign again as inflation indicators have improved over the summer, but it signaled the potential for a future rate hike as economic growth continues to exceed expectations.

The FOMC unanimously decided to hold the benchmark federal funds rate at its current range of between 5.25 and 5.5 percent—the highest rate in 22 years—keeping with analysts’ expectations. Committee members summarized their thinking in a policy statement that read mostly like the statement from their July meeting, when they raised rates by 25 basis points. “Recent indicators suggest that economic activity has been expanding at a solid pace,” the FOMC wrote. “Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” 

While inflation has been on a downward trajectory, Fed officials made clear they need to see more improvement before they would consider cutting rates. “What we decided to do is maintain the policy rate and await further data,” Powell said at a press conference Wednesday. “We want to see convincing evidence, really, that we have reached the appropriate level. We’ve seen progress, and we welcome that, but we need to see more progress.” The committee’s Summary of Economic Projections (SEP) signaled internal division over where rates could head in the coming months. Twelve of the committee’s 19 members see one more rate increase as likely necessary, whereas the remaining seven see the rate holding flat at the two meetings left before the end of the year. 

The Fed also appeared more optimistic about the economy next year and consequently more hawkish about the timeline for eventually cutting rates. Officials predicted in the summary that the median unemployment rate will be 3.8 percent in 2023—the same as the recorded rate for August—and 4.1 percent next year, down from their June prediction of 4.1 percent and 4.5 percent, respectively. They also see the median interest rate at the end of next year increasing to 5.1 percent—up from 4.6 percent. Those levels would suggest only two rate cuts next year (assuming there is another hike before January), down from the four cuts projected in June.  

The central bank seems content to continue a steady-as-she-goes approach, particularly in light of recent economic indicators that are sending mixed messages. “They’re now at the point where they’ve done the catch-up,” Stephen Miran—an adjunct fellow at the Manhattan Institute and former Treasury Department policy adviser—tells TMD. “And the data are starting to come in a lot more mixed. The cyclical parts of the economy, things like investments, they seem to be picking up a bit. The noncyclical parts of the economy, things like the labor market seem to be slowing down. There’s a lot of cross currents right now in the economy.”

The economy has seen successive months of improving inflation reports—August’s Consumer Price Index (CPI) showed a topline increase of 0.6 percent (3.7 percent annually) driven mostly by rising oil prices, but core inflation increased by just 0.3 percent (only slightly above expectations). Yet, Fed officials are likely concerned that inflationary pressures—buoyed by strong growth—could threaten to reverse some of that progress in the coming months.“There’s a number of reasons for that,” Miran says. “The downward pressure from autos is disappearing. There’s renewed pressure from energy prices. The downward pressure from health care in CPI is set to dissipate. The seasonal factors which drew down CPI in the summertime are likely to start pushing CPI up in the next few months.” 

The concern tracks with Powell’s warning in his annual policy speech at the Jackson Hole Economic Symposium last month. “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” he said. If growth remains strong, the Fed doesn’t want to cut rates too soon and leave inflation at elevated rates. He sounded a similar note in his remarks Wednesday: “If the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy to get back to 2 percent because we will get back to 2 percent.” 

And while Fed leaders are still optimistic they can pull off a soft landing—bringing inflation down to 2 percent without sparking a recession—some economists are skeptical, predicting that a recession may have been pushed further down the road by recent growth but not averted. Multiple surveys in recent weeks show a slim majority of economists expect a recession to hit sometime next year.  

Some indicators suggest the pent-up demand and excess savings from the pandemic that have fueled robust consumer spending are nearly tapped out. Economists at the Federal Reserve Bank of San Francisco estimated that consumers have already spent more than 90 percent of excess savings accumulated in 2020 and 2021 and that the remainder is likely to be exhausted by the end of this month. A sustained rise in energy prices—especially gas—could put both upward pressure on inflation and downward pressure on consumer spending, increasing the risk of a hit to economic growth. 

“The consumer has now a lot of headwinds coming to them with the complete expiration of all the stimulus spending. Now you’re paying back your student loans, and gas prices have gone up again,” Brendan Walsh, the principal at the financial analysis firm Markets Policy Partners, tells TMD.

Powell highlighted these risks along with potential volatility from labor strikes and the prospect of a government shutdown, but he also emphasized that taming inflation is the Fed’s primary goal. “That’s always a concern,” he said Wednesday when asked about the risk of high-interest rates contributing to a recession. “Concern No. 1 is restoring price stability because, in the long run, that’s something we have to do so that we can have the kind of economy we really want.” 

“The worst thing we can do is fail to restore price stability,” Powell added. 

Worth Your Time

• The federal deficit—the difference between how much money the federal government spends and how much it brings in—is ballooning. Given the circumstances, that’s a little weird. “It’s not totally unprecedented to see the federal budget deficit double from one year to the next, as it seems to have done this year,” Eric Boehm writes in a piece for Reason. “But those occasions, at least in the past 50 years, have always corresponded with bad stuff happening to the national economy. Compared to those other historical examples, however, this year seems like an outlier. Unemployment is low, the economy has been growing steadily, and inflation has significantly abated. America does not seem to be in a crisis at the moment, but the government’s balance sheet certainly is. And it is that way, in large part, because of the government’s own programs—as opposed to, say, an external event like a pandemic or a mortgage crisis. The big difference, then, between this year and 2002 (or 1977 or any of the few other times in recent history when the deficit has doubled) is that the drivers of this year’s shocking deficit growth are not temporary problems. They are structural problems—either as so-called ‘mandatory spending’ or as a function of the borrowing the government has already done—that will continue to mount until they are meaningfully addressed.”

Presented Without Comment

RealClearPolitics: Trump: Megyn Kelly “Was Pretty Nasty” In Interview Last Week

Also Presented Without Comment 

Washington Post: 96-year-old Judge Who Refuses to Retire Suspended for ‘Misconduct’

Toeing the Company Line

• In the newsletters: The Dispatch Politics crew reports on the pro-life movement’s Trump tightrope, Kevin explores (🔒) the right’s version of identity politics, Jonah explains (🔒) why so many men think so frequently about the Roman Empire, and Nick writes (🔒) in defense of the Senate dress code.  
• On the podcasts: David Lat is joined by his husband Zachary Baron Shemtob in a special episode of Advisory Opinions to discuss the potential Trump gag order, the Google antitrust trial, and more.  
• On the site today: Emma Rogers explains Sen. Tommy Tuberville’s military promotion blockade, and David Adesnik reviews Target Tehran, a book about Israel’s efforts to stymie Iran’s nuclear program. 

Let Us Know

Are you doing anything differently in anticipation of a potential recession next year? Also, how often do you think about the Roman Empire?