The Fed’s aggressive rate hike path is reinforced by new inflation and wage data

July 29 (Reuters) – Federal Reserve Chairman Jerome Powell said this week he was looking for convincing signs that inflation was easing before the U.S. central bank abandoned what has so far been its most aggressive series of interest rate hikes in decades.

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

Inflation according to the Fed’s preferred measure, the personal consumption expenditure price index, jumped 6.8% in June, its largest increase since 1982, and the rise in basic prices – excluding the price of food and energy and used by the Fed as an indicator of the outlook for inflation – accelerated. Read more

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

The data prompted traders of futures tied to the Fed’s target policy to start reversing another 0.75 percentage point interest rate hike at the Fed’s September policy meeting. , bringing the probability of this outcome to about one in three, up. one in four earlier on Friday.

“I’m confident we’re going to have to do more in terms of raising interest rates,” Atlanta Fed President Raphael Bostic said in an interview on the National’s “Morning Edition.” Public Radio before the release of inflation and wage data. “Exactly how much and then what trajectory will depend on how the economy develops over the next few weeks and months. We’re going to get a lot of data…before our next meeting” on September 20-21.

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

The Fed this week raised its target range for its key rate to 2.25%-2.50%, and for the first time since the current cycle of rate hikes began in March, Powell declined to specify exactly how much he expected the central bank to raise rates at its next meeting. Read more

That, along with his comments about easing consumer spending and a nod to the potential need to reduce the pace of Fed rate hikes, prompted some analysts and stock traders to conclude that the Fed would stop. soon to tighten its policy.

Much of Friday’s data seemed to undermine that thesis.

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

But there was some welcome news on the inflation front on Friday, as the University of Michigan’s Consumer Sentiment Index showed U.S. consumers in July downgraded their view of the direction. what inflation takes. Survey respondents said they see inflation next year declining to a rate of 5.2% from their previous expectation of 5.3% in June. This is the weakest one-year price increase expectation since February. Read more

While the drop may provide reassurance that inflation expectations have not eased, it remains 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 reading for gross domestic product in the second quarter and stoking fears that the economy is already, or soon will be, in recession. .

Powell is keeping an eye on this slowdown, but it was clear this week that with price stability of “fundamental” importance, his most important objective is to get inflation back on track towards the goal of the Fed.

“We have to be confident that inflation will come down to the prescribed constant levels,” Powell said.

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

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Reporting by Ann Saphir; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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