The Federal Reserve is competing to cool the overheating economy and will make a second extraordinarily large rate hike this week. The question for many economists and investors is how far central banks can go to curb inflation.
Central banks around the world have spent the last few weeks accelerating interest rate hikes. This is the approach they call “front loading”. The group includes the Fed, which has been the biggest move since 1994, raising one-quarter points in March, one-half points in May, and three-quarters points in June. May move on Wednesday.
Rapid movement means that authorities are determined to tackle inflation, hoping to convince businesses and families that today’s rapid inflation will not last long. And by urgently raising interest rates, we are aiming to quickly return the policy to a situation where economic growth makes little sense now that employment is abundant and prices are skyrocketing.
But after Wednesday’s expected move, the Fed’s main policy rate will be correct for what policymakers think is a neutral setting, which does not help or hurt the economy. Central banks may find the slowdown more comfortable when they see signs that the economy is starting to cool, as interest rates are high enough and are no longer actively driving growth. Federal Reserve Chairman Jerome H. Powell is likely to continue to expand his options, but economists and analysts have analyzed all the words of the press conference after Wednesday’s press conference to see the future of the central bank. Find hints about the direction of.
“I feel like 75 is in a book. What’s interesting is forward guidance,” said Michael Feroli, chief US economist at JP Morgan, and the key question is what happens next. I explained that I think it is. “It’s easier to slow down in the future, as every move goes into the tightening area.”
Fed’s latest economic forecast Released in June Authorities have proposed raising interest rates to 3.4% by the end of the year. About 1.6% now. Many economists interpret it as meaning that the Fed will raise three-quarters points this month, one-half points in September, one-quarter points in November, and one-quarter points in December. In other words, it suggests that a slowdown is coming.
However, policy expectations have been regularly overturned this year as data surprised authorities and found inflation to be stubbornly hot. Just this month, investors speculated that the Fed could bring a full percentage point rise this week, but central bankers and fresh data show that smaller moves are likely. After that, it was boiled down.
That changeability is the main reason likely to emphasize that the Fed is closely monitoring economic data in making policy decisions. The next meeting will be in September, nearly two months away, so central banks are advised to keep their options open so they can respond to evolving economic conditions.
“It’s probably premature, just as we want Powell to withdraw from the Fed’s recent highly aggressive tone,” said Ian Shepherdson, chief economist at Pantheon Macroenomics, in a study note before the meeting. I wrote in.
Still, there are several reasons why the Fed believes the path it has taken in its predictions will work.in the meantime Inflation continues It’s the fastest pace in over 40 years and can be slow when July data is released. Gasoline price I’m particularly depressed this month.
And while inflation expectations showed signs of jumping higher, earlier this month’s data eased one key indicator. Suppressing inflation expectations is paramount, as consumers and businesses can change their behavior if they expect rapid inflation to continue. Workers may demand higher wages to cover rising costs, companies may continue to raise prices to cover rising wage bills, and the problem of price increases persists Probably.
From unemployed billing to manufacturing measures, various other indicators of economic strength indicate a slowdown in the business environment. Societe Generale’s head of US interest rate strategy, Subadora Jappa, said the Fed’s slowdown should be on track if the cooling continues. The Federal Reserve wants the economy to ease, but they are trying to avoid putting it into a complete recession.
“As unemployment cracks begin, they need to take a more cautious approach,” Rajapa said.
The market is trembling recently. Central banks around the world are worried about over-promoting the fight against inflation and turning the economy into a tank in the process.Investors More and more bets The Fed could cut interest rates next year, probably because the central bank expects it to cause a recession.
“Central banks are very likely to skyrocket, and we’ll overdo it and fall into recession,” said Jennady Goldberg, interest rate strategist at TD Securities. “That’s what the market is afraid of.”
However, the signs of slowing growth and easing price pressures are still inconclusive, and price increases remain rapid, so the Fed may remain mobile.
US employers added 372,000 jobs in June, and wages continue to rise significantly. Private consumption has eased slightly, but is lower than expected. Rents continue to rise in many markets while the housing market slows.
Moreover, the outlook for inflation is dangerous. Gas prices may have slowed so far, but the risk of a resurgence awaits, for example, as government efforts to impose global price caps on Russia’s oil exports could fail. Rising rents mean that housing costs can help keep inflation rising.
Powell Clarified At a press conference in June, he said that three-quarter point rate hikes were unusual and “did not expect” them to be common. I am more confident that price increases have been curtailed.
“We, the Federal Reserve Bank, are very cautious and willing to continue this path of interest rate hikes until we have convincing evidence that inflation has turned around,” said Federal Reserve Bank of Cleveland Governor Loretta Mester. We need to work on it. “Said in Bloomberg Interview this month.
The central bank will get a new reading on the Consumer Expenditure Index (its preferred inflation gauge) on Friday. The data is from June and is expected to show continued rapid inflation both heading-based and after volatile food and fuel removal. The Employment Cost Index, an indicator of wages and benefits that the Federal Reserve is closely watching, was also released that day, and compensation is expected to rise sharply.
Given the recent decline in gasoline pump prices, inflation could fall for at least two months by September, but it is not guaranteed.
“They can’t prematurely imply that they think a victory over inflation will come,” wrote Shepherdson of the Pantheon.
