By Howard Schneider
WASHINGTON (Reuters) – Since the Fed decided to keep rates unchanged in June – At the policy meeting, U.S. central bank officials made it clear that they are ready to approve the Another small rate hike.
But recent data suggesting that inflation has begun to slow in a faster and more sustained fashion could fuel their debate over whether the upcoming steps are the last one needed, policymakers said. Investors will focus on the key question of whether the economy has fully absorbed the effects of the aggressive monetary tightening so far, or is just beginning to adjust.
In one scenario, further rate hikes may be needed to ensure that “deflation” continues; unnecessary damage.
Comments from officials favor further rate hikes after July 24-25 meeting, when the Fed’s policy-setting committee is expected to raise its benchmark overnight rate by a quarter of 5.24%-5.25% within a percentage point.
Federal Reserve Chairman Jerome Powell noted that a majority sees the need for two rate hikes, while Governor Christopher Waller weighed in at the central bank’s leadership before embargoing public comment ahead of this month’s meeting. The case for tightening policy was made in his final speech. (*Waller said last year’s rate hikes “should hit economic activity and inflation much faster than typically forecast,” so “we cannot expect tightening to lead to a further slowdown in demand and inflation.” Recent inflation data has been encouraging, but “one data point doesn’t tell a trend.”
Economists typically see monetary policy impact at 18 to 24 rates are adjusted for several months, but Fed officials noted that they use “forward guidance” to mark the policy path, which means Market interest rates adjusted before they started raising rates in March..
Other Fed officials stuck to their main strategic thrust of keeping the option to raise rates open, leaving investors no room to think The central bank is screwed – weakening the fight against inflation
But arguably this is the first time since the Fed raised rates by 25 percentage points in March 2019 The first imminent move of this possibility will be the last, and it has outgrown investor wishful thinking and is beginning to be supported by incoming data.
Beyond softening the pace of consumer price increases in June, reports on import prices and producer input costs were weaker than expected.
Producer prices in particular suggest that consumer inflation is likely to continue The slowdown. Falling import prices are important for the Fed, which hopes that the outright decline in commodity prices (which have soared during the coronavirus pandemic) can offset services sector inflation, which was typically higher and higher even before the pandemic. “Sticker.”
So far there has been no major disruption in the job market, with the unemployment rate still low at 3.6% and new jobs being created at a faster rate than before the pandemic Opportunity and wage growth. A central point of debate at the Fed is whether this poses a risk — a reason for inflation to remain high as household incomes rise — or a positive surprise that requires patience with future rate moves.
Richmond Fed President Thomas Barkin said last week that the current situation “still leaves us with the question of whether inflation will be able to Stabilizing”. The weak June inflation data left him unconvinced that inflation is on a steady decline.
However, signs of a new status quo appear to be emerging in the job market, whether it’s a continued decline in the employment ratio or an emerging There are new signs of the status quo. Available worker vacancies, a recent rise in the prevalence of part-time work, or some more subtle signal.
For example, while the number of workers in the food service and lodging industries is still lower than The pre-pandemic peak was a few percentage points lower, but the industry’s contribution to real GDP has increased since then: do more with less, probably without 2019 Number of employees level.
“There are growing signs that a ‘soft landing’ is heading towards a new equilibrium,” said Nick Bunker, head of research at Indeed Hiring Lab, referring to monetary tightening would slow the economy and inflation, but not trigger a recessionary scenario. “The labor market is stabilizing but remains strong” echoes the 2019 as participation picks up, job creation continues at a sustainable pace and wages rise for those on lower incomes
“Strange business cycle”
Until the Fed declares the inflation war over, however, economists and market analysts say risks to a benign outcome will remain.
Jason Furman, Professor, Harvard University, from 26 to 2019 Senior White House economic adviser in the Obama administration, underlying inflation remains around 3.5% by the Fed’s preferred metric.
“At 3.5%, July will not be the last time the Fed raises rates,” Furman said in an interview. “I think we know next to nothing about how to get inflation down from 3.5% to 2% … I worry that the last leg may require more job losses.” Meanwhile, Columbia Threadneedle senior rates analyst Ed Al- Hussainy is skeptical that the effects of the rapid rate hikes have been absorbed.
“We managed to bring inflation down and it seems to be getting more durable without doing much damage,” he said. “Why?”
The key inflation-adjusted interest rate benchmark has swung from negative to sharply positive, “I don’t think we’ve seen the full impact of that yet,” he said. “I don’t believe we’re in the same economic situation as negative 2% and positive 2% real rates.”
Fed officials acknowledged that their numbers could change. Atlanta Fed President Rafael Bostic said earlier this month that policymakers need time to accept what they believe to be true and are “inclining” to the idea that a soft landing may be on the horizon. Bostic believes that policy operates with a long lag and therefore prefers to keep rates steady.
Chicago Fed President Ostan Goolsbee told CNBC earlier this month that policymakers should not “be ashamed to Confidence in an economy that continues to surprise.
“Provided we need a recession to remove inflation,” Goolsbee said. “I don’t think … it’s a very strange business cycle. ”