Slowing U.S. inflation may have opened the door for the Federal Reserve to temper the pace of coming interest rate hikes, but policymakers left no doubt they will continue to tighten monetary policy until price pressures are fully broken.
A U.S. Labor Department report Wednesday showing consumer prices didn’t rise at all in July compared with June was just one step in what policymakers said would be a long process, with a red-hot job market and suddenly buoyant equity prices suggesting the economy needs more of the cooling that would come from higher borrowing costs.
Federal Reserve Governor Michelle Bowman said Saturday she supports the central bank’s recent big interest rate increases and thinks they are likely to continue until inflation is subdued.
The Fed, at its last two policy meetings, raised benchmark borrowing rates by 0.75 percentage point, the largest increase since 1994. Those moves were aimed at subduing inflation running at its highest level in more than 40 years.
That followed encouraging data that showed consumer prices rose 8.5% in July. The rate was slightly cooler than the 8.7% expected by analysts surveyed by Dow Jones and a slowing pace from the prior month.
As both CPI and PPI soften, markets have started to moderate their expectations for Fed rate hikes. Still, the positive data doesn’t mean it is “mission complete” for the Fed, said Ben Emons, managing director of global macro strategy at Medley Global Advisors.
The Fed raised its benchmark rate by 0.75 percentage point in both June and July — the largest back-to-back increases since the central bank started using the funds rate as its chief monetary policy tool in the early 1990s.
Victoria Fernandez, chief market strategist at Crossmark Global Investments, said the Fed is nowhere near putting the brakes and turning dovish on rate hikes, given the current data.
“For me, there’s not enough evidence for the Fed to make a huge pivot from where they are. I still think they’re considering 50, 75 basis points at the September meeting,” she told CNBC’s “Street Signs Asia” on Friday.
After Wednesday’s CPI report, traders of futures tied to the Fed’s benchmark interest rate pared bets on a third straight 75-basis-point hike at its Sept. 20-21 policy meeting, and now see a half-point increase as the more likely option.
Equity markets took a similar cue on hopes for a less aggressive central bank, with the S&P 500 rising 2.1 percent.
Financial markets are currently pricing a top fed funds rate of 3.75 percent by year-end, with rate cuts to follow next year, presumably as policymakers move to counter economic weakness.
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