Fed seen slowing on rate hikes as US inflation eases, but policymakers say more is needed

WASHINGTON (REUTERS) – Slowing US inflation may allow Federal Reserve policymakers to downshift their most aggressive round of monetary policy tightening in decades when they meet next month, though data on tap in the coming weeks could still change the picture.

After a US Labour Department report on Wednesday (Aug 10) showed that consumer prices did not rise at all in July compared with June, traders of futures tied to the Fed’s benchmark interest rate slashed bets that the central bank would enact a third straight 75-basis point hike at its Sept 20 to 21 policy meeting, and instead would opt for a half-point increase.

But Fed policymakers left no doubt that they will continue to tighten monetary policy until price pressures are fully broken.

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 consumer price index (CPI) report.

Mr Kashkari said he has not “seen anything that changes” the need to raise the Fed’s policy rate to 3.9 per cent by year end and to 4.4 per cent by the end of 2023.

The rate is currently in the 2.25 per cent to 2.5 per cent range.

Mr Kashkari is, to be sure, 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.

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 per cent to 3.5 per cent this year and to 3.75 per cent to 4 per cent by the end of next year, in line with what Fed chair Jerome Powell signalled 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 half a point, and then three-quarters of a percentage point in both June and July.

Traders now expect increases in the Fed’s policy interest rate to top out in December at 3.25 per cent to 3.5 per cent. United States stock markets took a similar cue on the hope for a less aggressive central bank, with the S&P 500 rallying 2.1 per cent on Wednesday.

Whether those hopes are warranted will be clearer in the coming weeks. For the Fed to scale back, subsequent inflation data will need to confirm the idea that price increases are slowing.

The CPI rose 8.5 per cent in July from a year earlier, Wednesday’s report showed. While that marked a drop from June’s 9.1 per cent rate, prices are still rising at levels not seen since the high inflation era of the 1970s and early 1980s. Food prices in July were up 11 per cent 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.

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