US Fed expected to pause on rate hikes after tame inflation data, but mission not over
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The Fed is increasingly likely to leave interest rates unchanged at their next meeting after fresh evidence of easing inflation.
PHOTO: REUTERS
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Atlanta, Georgia - United States Federal Reserve policymakers are increasingly likely to leave interest rates unchanged at their next meeting after fresh evidence of easing inflation, but they will be careful to strike a tone that their job is not done yet.
A report on Thursday showed the core consumer price index (CPI), which excludes often volatile food and energy costs, rose 0.2 per cent for a second month.
That marked the smallest back-to-back gains in more than two years, adding to a steady wave of disinflation in recent months.
The data “came in largely as expected, and that is good news”, Federal Reserve Bank of San Francisco president Mary Daly said in an interview on Yahoo! Finance.
“It is not a data point that says victory is ours. There’s still more work to do. And the Fed is fully committed to resolutely bringing inflation back down to its 2 per cent target,” she said.
Officials have been divided as to how to proceed from here.
One faction of the Fed’s policy-setting committee argue that the past 1½ year of interest rate hikes has done its job, while another group contends that pausing too soon could risk inflation re-accelerating.
It has been a balancing act to appease the two.
In June, the Fed held the federal funds rate steady for the first time since it started hiking rates in March 2022, but estimated two more increases in 2023.
The first of those was accomplished in July and it is unclear whether there will be a second.
Fed governor Michelle Bowman has reiterated that the US central bank may need to raise rates further
Cooling inflation, along with moderating growth in job gains and wages, has been fuelling hopes that the Fed can successfully tame inflation without triggering a big jump in unemployment.
Several economists, including those at JPMorgan Chase & Co and Bank of America, have scrapped their recession calls in recent weeks.
But Fed chair Jerome Powell will not go so far as to declare victory yet. While he has said the central bank is slowing its pace of hikes as it nears the peak, he is not ruling out the possibility of increases at consecutive meetings.
“The Fed does not need to hike in September, pleasing the doves who want no more tightening from here on out,” said LH Meyer/Monetary Policy Analytics economist Derek Tang. “Even the hawks would be fine with pausing until November or later, as long as the door to hikes is not closed all the way.”
Officials have said that monetary policy moves will depend on incoming data, with Ms Bowman saying she is “looking for evidence that inflation is on a consistent and meaningful downward path”.
The price growth slowdown seen in July “is enough to keep the Fed on the sidelines in September, but not enough to declare victory”, said chief economist Diane Swonk from KPMG in Chicago.
Policymakers will also see another CPI and jobs report before their Sept 19-20 meeting.
The Fed may want to keep open the option to hike later because of a potential re-acceleration in the economy, said Renaissance Macro Research head of economics Neil Dutta.
“The economy is growing above trend,” he said on Bloomberg Television. ”There is a risk that the Fed is patting itself on the back by the end of the year only to watch inflation potentially turn back up.” BLOOMBERG
