The Fed’s aggressive rate hike path bolstered by new inflation and wages data

July 29 (Reuters) – Federal Reserve Chairman Jerome Powell said this week that he is looking for convincing signs that inflation is abating before the U.S. central bank gives up its steepest set of interest rate hikes in decades.

In data released on Friday, he got largely the opposite.

Inflation according to the Fed’s preferred metric, the PCE price index, jumped 6.8% in June, its biggest rise since 1982, and the rise in core prices — excluding food and energy prices, which the Fed uses as an indicator of inflation expectations. – Accelerated. Read more

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Meanwhile, labor costs rose 5.1% in the second quarter from a year earlier, the fastest pace in decades.

The data prompted futures traders tied to the Fed’s target policy to begin repricing another 0.75 percentage point rate increase at the Fed’s September policy meeting, putting the probability of that outcome at one in three. From one of four earlier on Friday.

“I am convinced that we will have to do more in terms of raising interest rates,” Atlanta Federal Reserve Chairman Rafael Bostick said in an interview on NPR’s “Morning Edition” before the release of inflation and wages data. “Exactly how much and then the trajectory will depend on how the economy develops over the next several weeks and months. We’ll have a lot of data… before our next meeting” on September 20-21.

That data includes more than a dozen monetary readings covering inflation, employment, consumer spending and economic growth.

The Fed this week raised its interest rate target range to 2.25%-2.50%, and for the first time since the current rate-raising cycle began in March, Powell declined to say exactly how much he was expecting from the central bank. Raise interest rates at its next meeting. Read more

This, along with his comments about easing consumer spending and indicating the eventual need to reduce the pace of Fed rate hikes, has led some analysts and stock traders to conclude that the Fed will stop tightening soon.

Much of Friday’s data appears to undermine this thesis.

Oxford Economics analysts wrote that the hiring cost data, which Powell said Wednesday he will monitor, “provides no evidence that wage growth is slowing and leaves the Fed on track to raise the funds rate by another 75 basis points at its September meeting.” in a note.

But there was some welcome news on the inflation front on Friday, as the University of Michigan Consumer Sentiment Index showed that US consumers in July lowered their views on the direction of inflation. Survey respondents indicated that they see inflation next year regressing to a rate of 5.2% from their previous forecast of 5.3% in June. This is the lowest forecast for a one-year price increase since February. Read more

While this pullback may provide some relief that inflation expectations have not become too far fetched, it is still well above the Fed’s 2% target.

UMich

The rapid pace of Fed rate hikes this year has already begun to slow the economy, contributing to a negative second-quarter GDP reading and raising fears that the economy is already, or soon, in a recession.

Powell is watching this slowdown, but was clear this week that with price stability of “core” importance, his sharpest focus is getting inflation back on track toward the Fed’s target.

“We need to be confident that inflation will return to the steady levels needed,” Powell said.

Here is a table of key data expected ahead of the Federal Reserve’s September 20-21 meeting:

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(Reporting by Ann Sapphire.) Edited by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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