At its two-day policy meeting this week, the Federal Reserve is anticipated to keep interest rates unchanged while noting that inflation has started to approach the 2% objective set by the American central bank. This might lead to a reduction in interest rates as early as September.
Prior to the July 30-31 meeting, policymakers were hesitant to announce the exact date of the first rate cut. However, they were clearly pleased with recent data that indicated price pressures were generally decreasing, with headline inflation approaching the Fed's target and evidence from the housing, job, and other markets indicating that trend would persist.
According to data released on Friday, the Fed's preferred personal consumption expenditures price index increased by 2.5% in June following a 2.6% gain in May. The index was increasing by as high as 7.1% year over year in 2022. In reality, since March, the PCE price index has been increasing at an annualised rate of just 1.5%, which is half a percentage point less than the Fed's objective. Within striking distance of the 2% target, a companion measure that eliminates volatile food and energy costs is trending at 2.3% for the same time period.
The numbers may be sufficient, when combined with a more general feeling that price pressures are abating, to have the Fed reclassify inflation as "elevated" in their policy statement for next week and to acknowledge growing optimism that price rises will resume at the 2% rate. In light of recent statistics, policymakers may be running out of time to reduce interest rates as they have stated they should before inflation fully recovers to their objective.
The Fed "is only 50 basis points from the target... so it seems that is not very far," according to Jim Bullard, the dean of Purdue University's Mitchell E. Daniels Jr. School of Business and a former president of the St. Louis Fed.
"Is it still elevated? Sure. But it is not as elevated as it was," Bullard said. A slight change in the statement, perhaps describing it as "moderately elevated," would "send a major signal to markets that you are taking on board all that disinflation that has occurred over the last year and you think it is for real and you don't think it is going to turn around."
Since last July, the Fed has maintained its benchmark interest rate at the current range of 5.25% to 5.50%, which is among the longest periods of restrictive monetary policy in recent memory. The Fed raised the rate in an effort to slow the economy after inflation spiked.
For the time being at least, the Fed seems to have found a sweet spot, despite cautions issued last year that such stringent banking regulations may spark a recession. The rate of inflation has decreased, and although it has progressively increased, it is still 4.1%, which is close to what many Federal Reserve officials consider to be full employment.
A few statistics, such as the recent decline in house sales and the rise in loan delinquencies, might indicate weakness.
However, the most recent data on overall economic production showed unexpectedly robust growth in the second quarter, with an annualised rate of 2.8%. The Fed estimates that the economy's underlying potential growth is 1.8%, which is consistent with stable inflation.
"Inflation figures have been positive... The economy is obviously slowing down. Four months ago, there was a different mix of dangers. Completely halt," stated Nathan Sheets, Citi's global head economist. "It feels like they want to be a little more certain, so signal in July and cut in September."
On Wednesday at 2:00 p.m. EDT (1800 GMT), the U.S. central bank will announce its most recent policy statement. A news conference will be held by Fed Chair Jerome Powell thirty minutes thereafter.
Reversing the fastest rate hikes in four decades would begin with the Fed acknowledging that rate reductions are on the horizon. This would align the Fed with investors who believe that a quarter of a percentage point decrease is almost a given at the September 17–18 meeting.
Additionally, it would bring the Fed into the centre of the turbulent US presidential contest.
In an election where the Republican nominee, former President Donald Trump, has been the target of an assassination attempt and Vice President Kamala Harris has emerged as the Democratic nominee in lieu of President Joe Biden, inflation may not be the main focus of attention.
During a hearing earlier this month, Powell was informed by Republican lawmakers that a rate reduction in September may appear as an attempt to disadvantage Powell. Trump had appointed Powell as Fed chairman at the beginning of 2018, but he later became very critical of Powell's management of the central bank.
Nonetheless, most Fed officials—including some of the bank's most hawkish voices—agree that inflation is abating. In example, Fed Governor Christopher Waller—another Trump appointee—stated that the labour market was approaching the point where a sharp increase in the unemployment rate would be possible and that the inflation data was approaching the point when rate reduction would be appropriate.
In the meanwhile, prices and inflation could still play a role in the election.
Oxford Economics said in its most recent election modelling that swing voters may be swayed towards Trump and the Republicans if they continue to "fixate on the level of prices and how much they have risen," or towards Harris and the Democrats if they "focus on recent trends in inflation and the low level of unemployment." This is depending on how swing voters interpret upcoming economic data.
On that front, Fed rate reductions may be seen immediately and might result in cheaper borrowing prices for credit cards, home mortgages, and other personal and commercial financial goods.
(Source:www.reuters.com)
Prior to the July 30-31 meeting, policymakers were hesitant to announce the exact date of the first rate cut. However, they were clearly pleased with recent data that indicated price pressures were generally decreasing, with headline inflation approaching the Fed's target and evidence from the housing, job, and other markets indicating that trend would persist.
According to data released on Friday, the Fed's preferred personal consumption expenditures price index increased by 2.5% in June following a 2.6% gain in May. The index was increasing by as high as 7.1% year over year in 2022. In reality, since March, the PCE price index has been increasing at an annualised rate of just 1.5%, which is half a percentage point less than the Fed's objective. Within striking distance of the 2% target, a companion measure that eliminates volatile food and energy costs is trending at 2.3% for the same time period.
The numbers may be sufficient, when combined with a more general feeling that price pressures are abating, to have the Fed reclassify inflation as "elevated" in their policy statement for next week and to acknowledge growing optimism that price rises will resume at the 2% rate. In light of recent statistics, policymakers may be running out of time to reduce interest rates as they have stated they should before inflation fully recovers to their objective.
The Fed "is only 50 basis points from the target... so it seems that is not very far," according to Jim Bullard, the dean of Purdue University's Mitchell E. Daniels Jr. School of Business and a former president of the St. Louis Fed.
"Is it still elevated? Sure. But it is not as elevated as it was," Bullard said. A slight change in the statement, perhaps describing it as "moderately elevated," would "send a major signal to markets that you are taking on board all that disinflation that has occurred over the last year and you think it is for real and you don't think it is going to turn around."
Since last July, the Fed has maintained its benchmark interest rate at the current range of 5.25% to 5.50%, which is among the longest periods of restrictive monetary policy in recent memory. The Fed raised the rate in an effort to slow the economy after inflation spiked.
For the time being at least, the Fed seems to have found a sweet spot, despite cautions issued last year that such stringent banking regulations may spark a recession. The rate of inflation has decreased, and although it has progressively increased, it is still 4.1%, which is close to what many Federal Reserve officials consider to be full employment.
A few statistics, such as the recent decline in house sales and the rise in loan delinquencies, might indicate weakness.
However, the most recent data on overall economic production showed unexpectedly robust growth in the second quarter, with an annualised rate of 2.8%. The Fed estimates that the economy's underlying potential growth is 1.8%, which is consistent with stable inflation.
"Inflation figures have been positive... The economy is obviously slowing down. Four months ago, there was a different mix of dangers. Completely halt," stated Nathan Sheets, Citi's global head economist. "It feels like they want to be a little more certain, so signal in July and cut in September."
On Wednesday at 2:00 p.m. EDT (1800 GMT), the U.S. central bank will announce its most recent policy statement. A news conference will be held by Fed Chair Jerome Powell thirty minutes thereafter.
Reversing the fastest rate hikes in four decades would begin with the Fed acknowledging that rate reductions are on the horizon. This would align the Fed with investors who believe that a quarter of a percentage point decrease is almost a given at the September 17–18 meeting.
Additionally, it would bring the Fed into the centre of the turbulent US presidential contest.
In an election where the Republican nominee, former President Donald Trump, has been the target of an assassination attempt and Vice President Kamala Harris has emerged as the Democratic nominee in lieu of President Joe Biden, inflation may not be the main focus of attention.
During a hearing earlier this month, Powell was informed by Republican lawmakers that a rate reduction in September may appear as an attempt to disadvantage Powell. Trump had appointed Powell as Fed chairman at the beginning of 2018, but he later became very critical of Powell's management of the central bank.
Nonetheless, most Fed officials—including some of the bank's most hawkish voices—agree that inflation is abating. In example, Fed Governor Christopher Waller—another Trump appointee—stated that the labour market was approaching the point where a sharp increase in the unemployment rate would be possible and that the inflation data was approaching the point when rate reduction would be appropriate.
In the meanwhile, prices and inflation could still play a role in the election.
Oxford Economics said in its most recent election modelling that swing voters may be swayed towards Trump and the Republicans if they continue to "fixate on the level of prices and how much they have risen," or towards Harris and the Democrats if they "focus on recent trends in inflation and the low level of unemployment." This is depending on how swing voters interpret upcoming economic data.
On that front, Fed rate reductions may be seen immediately and might result in cheaper borrowing prices for credit cards, home mortgages, and other personal and commercial financial goods.
(Source:www.reuters.com)