Fed: U.S. economy can ‘withstand higher rates,’ economist says

BMO Senior Economist Jennifer Lee joins Yahoo Finance Live to discuss ADP report data, the expectations for the Fed’s FOMC meeting, the state of the labor market, inflation, and consumer spending ahead of the holiday season.

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- The Federal Reserve is widely expected to once again raise interest rates by 75 basis points for the fourth consecutive meeting. Joining us to break it all down is Jennifer Lee BMO senior economist. Thanks so much for taking the time as always, Jennifer. Always value your insights. When we think about the data that's been coming through, though, this doesn't really make the Fed's job any easier quite frankly. Especially if we're looking at some of the employment data that has continued to pour in this week and even ahead of the monthly jobs report.

JENNIFER LEE: Good morning. And you're right. It's not only the jobs data. Then, of course, you're referring to the JOLTS data that we saw yesterday. This morning's ADP was also above expected. Even the auto sales data, depending on which report you're using, hit the highest level since earlier this year. So it just goes to show that the economy can still withstand higher rates.

And for sure, I would love to be a fly on the wall this afternoon when the Fed concludes its meeting. But, you know, like everyone else, we're looking for another 75 basis point move this afternoon. But, of course, what he says during the press conference is what everyone's going to be hanging their hat on.

- And so Jennifer, just, I guess, to ask that a slightly different way. When we look at data like the ADP report this morning, which came in higher than estimated, maybe as a precursor for the jobs report on Friday, is that data a problem for the Fed? And should it be, not to say, overlooking jobs data, but maybe focusing on other indicators to give us a better idea of whether their efforts to bring inflation down are working?

JENNIFER LEE: You're right. I think they are. But at the end of the day, it's all going back to the labor market. Because you've got-- there are two mandates. And the labor part, the employment part can be checked off. But they still see the job market as being far too strong and too tight. And they are OK with just loosening it up a little bit. Because if it's too tight, then it's going to suggest that wage pressures will continue to bubble along. And that's going to be very inflationary. And that's what we are continuing to see.

We saw that last week in the ECI report. The wages data from the personal income and spending numbers that were out last week also continue to point to strong wage pressures, which, as I always say, it's such a weird thing. It's a good thing for consumers because they're getting more money in their pockets. But at the same time, it's very difficult for businesses, as they're passing out more, it's costing them a lot more. And again, it's that whole inflationary impact that the Fed is trying to tamp down on.

- For another rate increase before the holidays on top of several rate increases this year. What does that mean for consumer spending in the fourth quarter?

JENNIFER LEE: It's going to cool it even further. It's already started, right. We've already see-- we're already starting to see the slowdown in spending in the retail sales front. But at the same time, because we're still looking at strong savings, they've been working it down on their pile of savings. At the same time, there's still money coming in terms of the wage front.

So that helps. But I think consumer spending has already-- again, has already started to slow. And it will slow further. We are still looking forward to consecutive quarters of negative GDP growth in the new year. And contributing to that will be slower consumer spending.

- If consumers make it through this holiday season, perhaps, with the amount of spending that is anticipated and are still healthy in their household balance sheets, is there a point that you look out to next year, where there's a serious checkpoint that needs to be done to really see if the consumer strength in their household balance sheets is actually still there or if that has withered post a major spending cycle?

JENNIFER LEE: Well, I would hope that it's not going to be withering too much. You know, we want the-- or the Fed wants the consumer to slow the spending down, but not to the point that it's going to be catastrophic, I guess. Again, they're just looking to slow spending, slow economic growth down, cool inflation back down towards 2% or heading towards that pace, to that level before they start cutting rates, if we even start talking about cutting rates.

But I think it's quite possible that we could actually see a non-dovish tone today during the press conference. I mean, the base case right now is that he's going to start talking about or hinting towards slower rate increases. But there's a chance, just give us some of the data that we've been seeing lately, that he doesn't do too much on that front and still continues to point or warn to higher rates ahead.

- Jen, if we fast forward a year from now, what does the unemployment rate look like, given that there are still so many openings out there, for example, and the jobs numbers have been holding up pretty well?

JENNIFER LEE: Higher. In a word, higher. You know, we're looking for a base maybe about a percentage point higher or so. 1 and 1/2 percentage points higher than where we are now. Again, this is just part and parcel of what happens during a recessionary time. Again, we're looking for a mild recession, not a hard landing.

But at the same time, it's going to be some pain felt. That word that has been used broadly across the world by central bankers these days. There will be some pain felt by both consumers and households. And, of course, that's going to impact the labor market. So that's where we're going to see some of the loosening up of job demand and on the wage front.

- Jennifer Lee, BMO senior economist, always good to see you. We'll talk to you soon.