Federal Reserve policymakers are increasingly likely to leave interest rates unchanged at their next meeting in September after fresh data showed further signs of cooling inflation.
The core consumer price index, which excludes often-volatile food and energy costs, rose 0.2% for a second month, Bureau of Labor Statistics data showed Thursday. That marked the smallest back-to-back gains in more than two years. The overall CPI also increased 0.2% in July and 3.2% from a year earlier.
“The Fed’s got to be encouraged by two lower numbers in a row,” said Stephen Stanley, chief US economist at Santander US Capital Markets. “I think their intention is to skip in September. This certainly isn’t the last word.”
The Fed in July increased the federal funds rate to a range of 5.25% to 5.5%, the highest level in 22 years. The median estimate of Fed officials’ most recent quarterly projections, published in June, showed two more rate increases this year, the first of which was accomplished with last month’s hike.
Fed officials have given differing opinions on the need for more hikes, with Governor Michelle Bowman reiterating Monday her view that the US central bank may need to raise rates further in order to fully restore price stability, while Philadelphia President Patrick Harker said Tuesday the US central bank may be able to hold steady from here on out.
All the Fed officials have said that monetary policy moves will depend on incoming data, with Bowman saying she’s “looking for evidence that inflation is on a consistent and meaningful downward path.”
“The Fed does not need to hike in September, pleasing the doves who want no more tightening from here on out,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “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.”
Chair Jerome Powell has said while the central bank is slowing its pace of hikes as it nears the peak, he isn’t ruling out the possibility of increases at consecutive meetings. He will have the opportunity to influence his colleagues and markets at the Kansas City Fed’s conference in Jackson Hole, Wyoming, later this month.
More Data
While Thursday’s report is regarded by economists as very important for the Fed, there will be one more consumer-price report on Sept. 13, prior to the Fed’s Sept. 19-20 meeting.
“The numbers are good enough to keep the Fed on hold for the time being,” said Kathy Jones, chief fixed income strategist at Charles Schwab & Co. “ If we continue to get similar month-to-month changes in the vicinity of 0.2%, that translates into a declining annualized inflation rate. That should make the Fed more confident that inflation is coming down to its target.”
The central bank will also get one more key jobs report before its September meeting. On Friday, a BLS report showed nonfarm payrolls increased 187,000 last month — less than forecast — while the unemployment rate unexpectedly dropped to 3.5%, one of the lowest readings in decades.
The Fed may want to keep open the option to hike later because of a potential re-acceleration in the economy, said Neil Dutta, head of economics at Renaissance Macro Research LLC.
“The economy is growing above trend,” Dutta said on Bloomberg Television. “I don’t think the Fed has done enough. 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.”
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Steve Matthews
