Fed open to another interest rate hike after expected increase in July

Though the Fed officials were encouraged by a slide in price pressures in June, but they’re don’t want to pronounce an end to their battle to rein in inflation that has repeatedly surprised them with its persistence. 

“It’s really too early to say that we’ve declared victory on inflation,” Bloomberg reported quoting Mary Daly, Federal Reserve Bank of San Francisco President’s CNBC interview.

“The robust strength of the labor market and the solid overall performance of the US economy gives us room to tighten policy further,” Reuters reported quoting Federal Reserve Governor Christopher Waller.

The Reuters report said the Federal Reserve Governor supported the Fed hiking by two more quarter percentage point increases this year. Waller noted “I see no reason why the first of those two hikes should not occur at our meeting later this month.” 

He further said “If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future.” He noted, “September is a live meeting” for action if inflation is not cooling fast enough.

Waller’s comments follow the release earlier in the week of data that showed inflation pressures at the consumer level are swiftly cooling back toward the Fed’s 2% target.

Investors have increased bets that the widely anticipated quarter-percentage-point increase at the Fed’s July 25-26 meeting will be the central bank’s last in this credit tightening cycle. Stock and bond prices bounded higher on those expectations this past week, with the yield on the Treasury’s two-year note – a market barometer of the Fed’s intentions – falling to 4.76% from 4.95% on July 7.

Consumer prices rose 3% in June from a year earlier, compared with 4% in May, the Labor Department reported on July 12. That was the smallest increase in more than 24 months and well below the 9.1% surge seen just a year ago.

That in turn fueled hopes that the central bank can pull off a fabled “soft landing” of the economy — bringing inflation down without crashing the US into recession.

“You cannot get in the way right now of the soft-landing narrative — that narrative is building momentum,” Bloomberg reported Mohamed El-Erian, chief economic adviser at Allianz SE and an Opinion columnist at Bloomberg.

Fed officials, for their part, are cautious about reading too much into any one month’s data, no matter how reassuring it is. That’s especially the case given that they’ve been fooled before by let-ups in price pressures only to see them subsequently pick up.

The Fed held interest rates steady in June after raising them for 10 straight meetings to a range of 5% to 5.25%. Most policymakers expected at that time to increase rates twice more in quarter-point increments by the end of the year, based on projections released after their June gathering.

Going into this month’s meeting, a variety of officials reaffirmed that view while stressing that the ultimate outcome will depend on how the economy evolves.

Policymakers have said they’re more comfortable pushing ahead with another rate increase now because a much-feared credit crunch has yet to materialize. Several though – including Fed Chair Jerome Powell – have cautioned that it’s too soon to completely declare the all-clear in the wake of banking turmoil earlier this year.

It’s not only the persistence of inflation that’s surprised policymakers. It’s also been the resilience of the economy, especially the labor market, in the face of the Fed’s most aggressive credit tightening in decades.

Powell has repeatedly said that some softening of the labor market would likely be needed to bring inflation back to the Fed’s 2% target.

There are signs that’s happening. Payroll growth slowed to 209,000 last month — the smallest advance since the end of 2020, but still more than twice the roughly 100,000 pace that Powell has suggested would be just right for the economy in the long-run.

Wage growth has moderated, but it remains above levels that Fed officials reckon is consistent with the 2% inflation target. Average hourly earnings rose 4.4% in June from a year earlier, down from a high of 8.1% in April 2020, shortly after the pandemic started, but above the 3.3% average that prevailed in 2019.

That’s led Powell and other policymakers to judge that there’s a greater danger of the Fed not doing enough to rein in inflation than in it doing too much and triggering a deep recession – though they’ve also said those risks are more in balance now after repeated rate increases.

“We are closer to the end of our tightening phase than the beginning,” Cleveland Fed President Loretta Mester said in a July 10 speech. “That said, the economy has shown more underlying strength than anticipated earlier this year, and inflation has remained stubbornly high.”

(With inputs from agencies)

Updated: 16 Jul 2023, 07:17 PM IST