A slowdown in inflation last month, after recent indications that the job market is strong, makes the Federal Reserve’s decision at what rate to raise interest rates next month more complex.
● Peak inflation behind us? The data in the US provide reasons for optimism
● Vigilance in the markets for the inflation data in the US: this is what the world’s leading economists are predicting
Data on inflation and economic activity are expected to determine whether the central bank governors will raise the benchmark interest rate on federal funds by half a percent or three-quarters of a percent, at a policy meeting to be held on September 20-21. They said they want to see evidence that price pressures and economic growth are cooling before they moderate the pace of their rate hikes.
Wednesday’s inflation report leaves the door open for the Federal Reserve to raise the rate by half a percent in September if more data is released to confirm that price pressures are easing. But a 0.75% increase is still possible after recent reports of accelerating job and wage growth suggest large wage increases are likely. To maintain strong consumer spending and high prices.
First sign of easing inflation
The declines in the prices of energy, airline tickets and used cars last month gave the first sign of easing inflation since the spring, after widespread price increases in May and June spooked central bank officials.
The Labor Ministry announced on Wednesday that its consumer price index was flat between June and July and rose 8.5% from a year earlier, slowing from the 9.1% pace recorded in June.
Core prices, which do not include volatile categories of food and energy, rose 0.3% in June, much less than the 0.7% increase in June compared to May. The core index rose by 5.9% in July compared to a year earlier, the same annual rate as in June.
The Federal Reserve raised interest rates by 0.75% at its July meeting, following another increase in June, which was the largest since 1994.
At a press conference on July 27, Fed Chairman Jerome Powell said that another 0.75% hike could be possible at the September meeting but “will depend on the data we get between now and then.”
He said the central bank needs to see convincing evidence that monthly inflation figures are falling before it cuts interest rate hikes to more traditional quarter-percent jumps, especially after governors were burned last year by a slowdown in price readings that turned out to be a temporary reprieve. By the date of the meeting in September, the governors will be exposed to another report on the consumer price index.
Inflation fell last summer “and then turned around and went back up,” Powell said at a press conference in June. “So I think we’re going to be cautious about declaring victory.”
will moderate the interest rate increases
Several Fed governors hinted that the central bank might raise interest rates by half a percent in September, and financial market participants ran with the idea that the central bank would soon moderate rate hikes. But critically, it depends on there being a slowdown in economic activity, especially employment. Two labor market reports since the Fed’s July 26-27 meeting showed no such signs.
“We tightened monetary policy quite a lot, very quickly,” Chicago Fed President Charles Evans said Wednesday while speaking in Des Moines, Iowa. He said he expects the central bank to raise interest rates for the rest of the year and into 2023 to make sure inflation returns to the Fed’s target of 2% down the road.
Evans told reporters last week that he expected the central bank to raise interest rates by half a percent in September before slowing to quarter percent hikes in November and December. He thought the Fed would have to raise interest rates another half a percent early next year.
The unemployment rate is falling
Employers added 528,000 jobs in July and the unemployment rate dropped to 3.5% compared to 3.6% in the four months before July, the Ministry of Employment said last week. The increase in employee salaries was stronger than economists had expected in July and was revised upwards in June as well.
A separate report by the Ministry of Employment on workers’ wages published on July 29 and considered by many in the Fed also showed a rapid increase in salaries and other employment costs.
On Wednesday, Evans said he did not think last week’s employment data showed that inflationary pressures required the central bank to raise interest rates more aggressively.
The American economy shrank for the second quarter in a row between April and June, the Commerce Department reported last month, as the housing market slowed due to rising interest rates and high inflation took the wind out of the sails of companies and consumer spending.
Last week’s employment data “underlines even more the difference between the labor market signal and the gross domestic product signal,” St. Louis Federal Reserve President James Bullard said in an interview Monday. Business owners and other managers are still struggling to find workers, he said. “We still have a long way to go in the job market,” Bullard said.
Bullard said that while Fed officials expected inflation to decline, “we’re going to need real, broad evidence that inflation is coming down before we can be confident.”
Bullard added that he supports raising interest rates by a total of 1.5% in the Fed’s three remaining meetings until the end of the year, and said that he continues to support the bank’s approach of “front-loading” interest rate increases – to approve larger increases at the beginning of the process instead of spreading smaller interest rate increases over an extended period. Another 0.75 percent increase in September “is definitely on the table,” he said, but added, “The good news is that I don’t have to make the decision on that today.”