The U.S. Federal Reserve will raise rates by 50 basis points in September amid expectations inflation has peaked and growing recession worries, according to economists in a Reuters poll, who said the risks were skewed towards a higher peak.
Still around a four-decade high, inflation eased last month, driving Fed funds futures to narrowly switch their pricing to a 50 basis point hike in September after 75 basis point moves in June and July.
Most economists in an Aug. 16-19 Reuters poll predicted a half percentage point hike next month, the same as in the last poll, which would take the key interest rate to 2.75%-3.00%.
As fears about out of control inflation have eased, the markets now see a greater chance of a 50bps hike at the September 20-21 Fed meeting. Previously a 75bps move was the more likely outcome.
Then markets then expect a similar 50bps move up in November followed by a smaller 25bps hike in December. This is based on data from the CME’s FedWatch Tool. The real uncertainty concerns where rates will move in 2023 with a far broader set of outcomes depending on the trajectory of inflation and the U.S. economy.
Though the high rate of U.S. inflation is not over, falling oil prices since mid-June imply that inflation is easing based on recent CPI and PPI data. Stocks have also broadly moved up since then.
The good news is oil prices have generally drifter lower in August too, so that should help soften the August inflation number, though perhaps not to the same degree as July. Plus natural gas prices are currently spiking, which may offset some of the downward move in oil.
The consumer price index was flat for July but was up 8.5% from a year ago. A separate measure the Fed follows, the personal consumption expenditures price index, rose 1% in June and was up 6.8% year over year.
Minutes released last week from the Fed’s July meeting show that officials are likely to remain on a hawkish course, despite hopes from markets in recent weeks that policymakers could slow the pace of rate hikes.
“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” the minutes said. “They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and could remain uncomfortably high for some time.”
While the rapid pace of price increases eased slightly in July with the monthly increase flat at 0%, the consumer price index still climbed 8.5% from the previous year – hovering near a painful, four-decade high, the Labor Department reported last week. Markets rallied on the lighter-than-expected report, with investors hoping the Fed could take its foot off the gas in the coming months.
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