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Fed officials say more rate hikes needed, despite slowing inflation

Economy Aug 11, 2022 02:26PM ET
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© Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, D.C., U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo
 
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By Ann Saphir and Howard Schneider

(Reuters) -Slowing U.S. inflation may have opened the door for the Federal Reserve to temper the pace of coming interest rate hikes, but policymakers left no doubt they will continue to tighten monetary policy until price pressures are fully broken.

A U.S. Labor Department report Wednesday showing consumer prices didn't rise at all in July compared with June was just one step in what policymakers said would be a long process, with a red-hot job market and suddenly buoyant equity prices suggesting the economy needs more of the cooling that would come from higher borrowing costs.

The Fed is "far, far away from declaring victory" on inflation, Minneapolis Federal Reserve Bank President Neel Kashkari said at the Aspen Ideas Conference, despite the "welcome" news in the CPI report.

Kashkari said he hasn't "seen anything that changes" the need to raise the Fed's policy rate to 3.9% by year-end and to 4.4% by the end of 2023.

The rate is currently in the 2.25%-2.5% range.

To be sure, Kashkari is the Fed's most hawkish member; most of his 18 colleagues believe a little less policy tightening may be enough to do the trick to bring prices under better control.

San Francisco Fed President Mary Daly, in an interview with the Financial Times, also warned it is far too early for the U.S. central bank to "declare victory" in its fight against inflation.

However, Daly said that a half-percentage point rate rise was her "baseline" but did not rule out a third consecutive 0.75% point rate rise at the central bank's next policy meeting in September, according to the report.

Calling inflation "unacceptably" high, Chicago Fed President Charles Evans said he believes the Fed will likely need to lift its policy rate to 3.25%-3.5% this year and to 3.75%-4% by the end of next year, in line with what Fed Chair Jerome Powell signaled after the Fed's latest meeting in July.

Still, he said, the CPI report marks the first "positive" reading on inflation since the Fed began raising interest rates in March in increasing increments -- a quarter of a percentage point to start, then a half a point, and then three-quarters-of-a-percentage point in both June and July.

After Wednesday's CPI report, traders of futures tied to the Fed's benchmark interest rate pared bets on a third straight 75-basis-point hike at its Sept. 20-21 policy meeting, and now see a half-point increase as the more likely option.

Equity markets took a similar cue on hopes for a less aggressive central bank, with the S&P 500 rising 2.1%.

Financial markets are currently pricing a top fed funds rate of 3.75% by year-end, with rate cuts to follow next year, presumably as policymakers move to counter economic weakness.

Kashkari called that scenario unrealistic, and said Fed policymakers are "united" in their determination to bring inflation down to the Fed's 2% target. The risk of recession "will not deter me" from advocating for what's needed to do so, he said.

DATA ON TAP

For the Fed to scale back, fresh inflation data will need to confirm the idea that price increases are slowing.

The consumer price index rose 8.5% in July from a year earlier, Wednesday's report showed. While that marked a drop from June's 9.1% rate, prices are still rising at levels not seen since the 1970s and early 1980s. Food prices in July were up 11% from the year before, devastating for lower income families in particular.

For the moment, however, analysts focused on the fact that, after months in which accelerating price pressures pushed Fed policymakers to tighten credit conditions faster than at any time since the 1980s, inflation data finally surprised in the other direction.

"The Fed needs a lot more evidence (of slowing inflation)... but this is a good start," said Karim Basta, chief economist with III Capital Management.

Data on August consumer inflation will be released on Sept. 13, the week before the Fed meets, and given recent trends in energy and some other prices the report "should also be friendly to the disinflation path and should make a 50 basis point hike the preferred option."

Still, the Fed's battle with high inflation is far from over.

The core consumer price index - which strips out volatile gas and food prices and is seen as a better predictor of future inflation - rose 0.3% from June and 5.9% from a year earlier.

The Fed targets 2% inflation based on a different index that is rising at a lower, but still high, rate of more than 6%.

An alternative measure of consumer prices compiled by the Cleveland Fed, known as the Median Consumer Price Index and considered a good view of the breadth of prices pressures in the economy, rose 6.3% on an annual basis in July, compared to 6% in June.

"Overall, prices remain uncomfortably high," wrote High Frequency Economics' Rubeela Farooqi, who stuck with her call for a 75-basis point rate hike next month. "Coupled with strength in job growth and wages, the data support the case for another aggressive rate hike in September."

Fed officials say more rate hikes needed, despite slowing inflation
 

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Comments (12)
jason xx
jason xx Aug 11, 2022 3:36PM ET
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Lmao like any of the matter besides Jpow.
Michael Wilson
Michael Wilson Aug 11, 2022 2:42PM ET
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The stock market may not believe the Fed, but the bond market sure does. Look at the 10Y today. It's up 4%. No wonder stocks are falling. Also, look at energy and commodities. They too are soaring. CPI dropped a smidgen because they fell. But now they are right back rising. That's bad news for the next CPI report.
Laurent Chavey
Laurent Chavey Aug 11, 2022 4:00AM ET
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we have a semi senile president' a deranged house speaker and an egotistical senate leader, not to mention the giggling vice president. on the other side we have an embattled ex president, a senate minority leader that is against any collaborative work and an invisible house minority leader. unless something changes soon, corporate America is leaving the dream, raise prices, colluding with each other to stimy competition and reward wall street.
Laurent Chavey
Laurent Chavey Aug 11, 2022 3:54AM ET
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the media are so bias toward the current administration that they will twist all the numbers to come up with a positive narrative. the bottom line has not changed, American are struggling to make ends meet, congress has done nothing to help, other than that fake inflation réduction act, that does nothing to reduce inflation.the stock market is running higher based on pure speculation.
Brad Albright
Brad Albright Aug 11, 2022 3:54AM ET
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Speaking of pure speculation...
Ramesh Shah
Ramesh Shah Aug 11, 2022 3:48AM ET
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Wall street is fired up and wants suckers to join the rally so smart money can exit with good 20% profuts
Kris Jay
Kris Jay Aug 11, 2022 3:48AM ET
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i dont think its wall street looking at the volumes.  today you did have wall street taking advantage of retail traders by selling NASDAQ early morning peak.   you can see the volume, spikes of 40M shares.   so wall street didnt push the rally, every-day-trader did,  probably young people who have never seen a down economy.    wall street just steps aside, waits for the news and peak (timing it perfectly to today) and then sells short or sells positions they had made at bottom.
Kevin Le
Kevin Le Aug 11, 2022 12:27AM ET
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Temporary relief on energy prices. Wait until winter comes around. Energy is going to spike
Benjamin USA
Benjamin USA Aug 10, 2022 11:47PM ET
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Kashkari is a joke. Biggest dove now biggest hawk. Time to retire
Jack Zydron
Jack Zydron Aug 10, 2022 11:34PM ET
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BS, on 350.000 mortgage people will be paying $700 more monthly. the full effect t of recent changes will come in time once locked mortgages will be coming up for renewal. any further changes will destroy economy.
Erski Gumby
SB20 Aug 10, 2022 11:27PM ET
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What happened to all the smart comments in https://investing.com? Now it’s full of spammers and bots.
Jack Sailor
Jack Sailor Aug 10, 2022 5:40PM ET
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FACTS: Gas is up 44% from last year.Electricity is up 15.2% from last year.Food is the most expensive since1979.The Biden White House is living in afairytale while Americans are living ina nightmare.###
 
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