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Federal Reserve chair Jay Powell had a message for global markets on Wednesday after the US central bank raised interest rates again: no one should doubt its resolve to snuff out stubbornly-high inflation in the world’s biggest economy.
That could mean more rate rises this year, Powell insisted in the press conference after the Fed’s announcement. It was a stern warning, but economists and investors were largely unmoved.
Most of them anticipate that the quarter-point increase, which lifted the federal funds rate to a target range of between 5.25 per cent and 5.5 per cent, a 22-year high, will mark the finale of the Fed’s rate-rising cycle.
“Nothing in the policy statement or the press conference led me to doubt our view that this will be the last hike of the cycle,” said Ellen Zentner, chief US economist at Morgan Stanley. “The consumer is slowing, jobs are slowing, inflation is slowing and all those big pieces of the economy have been coming in line with our expectations.”
Powell on Wednesday said the Federal Open Market Committee would scrutinise the “totality” of new economic data before making any decisions, suggesting that while further tightening was possible, it was by no means guaranteed.
“We have to be ready to follow the data,” he said. “And given how far we’ve come, we can afford to be a little patient as well as resolute as we let this unfold.”
Economists broadly expect inflation to keep cooling through the next couple of months. Ian Shepherdson, chief economist at Pantheon Macroeconomics, believes the “core” consumer price index, which strips out volatile food and energy prices, will gain just 0.1-0.2 per cent in July and August, equating to a three-month annualised pace of just 1.8 per cent by the time the FOMC meets again in September.
“Numbers like that will make it harder for the Fed to justify hiking again, provided the gentle but persistent downward trend in payroll growth continues,” Shepherdson said.
Tiffany Wilding of Pimco also forecasts inflation to drift lower in the second half of the year, and crucially, for labour demand and economic activity to take a hit as the Fed’s earlier rate rises and tighter credit conditions bite. She has not pencilled in further rate increases this year.
Jonathan Pingle, chief economist at UBS, also expects that the Fed will stand pat after Wednesday’s move — but said it was far too “premature” for Powell or any official to concede as much, given how far core inflation remains above the central bank’s 2 per cent target.
“We’ve had some false dawns before, so as much as we think there is going to be improvement going forward, we’re not out of the woods yet for inflation,” he said. “Until they get more confirmation on inflation, it is going to be hard to signal that they’re done.”
One inflationary risk cited by Powell was the enduring strength of the US economy itself, which has chugged along despite the Fed’s historic campaign over the past 18 months to crush demand with punishingly high borrowing costs.
The economy’s resilience was “good to see”, Powell said, adding that it boded well for the Fed’s efforts to curb inflation without inducing a significant economic downturn. The central bank’s staff had also become more upbeat about the outlook, scrapping a forecast for recession that they held as recently as last month.
But amid good news, Powell had a warning too: “At the margin, stronger growth could lead over time to higher inflation and that would require an appropriate response from monetary policy.”
Economists at Oxford Economics pointed to other lurking shocks that could prompt the Fed to maintain its aggressive grip on the economy, including another bounce in US food prices triggered by El Niño, the weather phenomenon that has disrupted agriculture in the past and is expected to start later this year.
Benson Durham, head of global policy at Piper Sandler and a former senior staffer at the Fed, is one of the few voices wagering that the central bank will be cornered by the data into more rate rises — a trajectory in monetary policy that would match the projections officials submitted in June.
Those individual forecasts signalled support for the fed funds rate to peak at a target range of between 5.5 per cent and 5.75 per cent in 2023, equating to another quarter-point increase at one of the three remaining meetings this year. Durham expects September to be a close call but for the Fed to opt for November.
Either way, Morgan Stanley’s Zentner warned that the next couple of months would be tumultuous given the uncertainties clouding the outlook.
“Turning points are always difficult — and very difficult for the Fed to communicate, because policymakers like to be vague and markets don’t respond well to vagueness,” she said. “So it means a lot of volatility as we dissect these next datapoints.”