Economic news

Fed hikes rates by 0.25% to put further squeeze on inflation following June skip

2023.07.26 14:13


© Reuters

Investing.com — The Federal Reserve raised interest rates by a quarter-point on Wednesday, signaling the need to put a further squeeze on the elevated inflation after skipping a hike last month.

The Federal Open Market Committee, or FOMC, the rate-setting arm of the Fed, raised its to a range of 5.25% to 5.5%.

“The committee will continue to monitor the implications of incoming information for the economic outlook,” the Fed said in a statement. 

The return to the rate-hike table followed recent data showing that the economy grew faster than expected in the first quarter; the labor market cooled in June; and inflation slowed more than expected.

The most recent reading on the core personal consumption expenditures price index — which excludes food and energy prices, and is closely watched by the Fed as a more indicative measure of underlying price pressures — rose by 0.3% in May from 0.4% and slowed to a pace of 4.6% on an annual basis from 4.7% previously.

The Big Debate – Is Disinflation Transitory or Here to Stay? 

As inflation continues to trend above the Fed’s 2% target, there is much debate on whether the recent signs of slowing price pressures, or disinflation, can persist, or may prove transitory.

Those in the ‘disinflation is transitory’ camp flag sticky price pressures in the inflation-heavy services sector supported by a still-strong labor market, in which real annual wages are on the up and up for the first time since March 2021, as risks to upside inflation.

“In contrast to the stabilization in goods prices, service price inflation has been much stickier. Manufacturers have seen the peak in their input prices, but service sector businesses continue to deal with higher labor costs,” Jefferies said in a recent note.=

Others, however, believe disinflation is here to stay, and will likely force the Fed to downgrade its inflation forecasts.

Core PCE inflation is tracking below its projections, Morgan Stanley said in a recent note, likely leading to a “downgrade in the Fed’s inflation forecasts at the September meeting.”

This debate is set to continue in the months ahead, and drive expectations about whether the Fed may follow through on its projections, released in June, for one more hike when it returns from its summer hiatus in September.

All Eyes on Powell on Rate Path Ahead

Fed Chairman Jerome Powell’s press conference at 14:30 ET is likely to be closely watched for any further clues on the rate path ahead, with some expecting a less hawkish tone from the Fed chief.

“[O]ur sense is Chair Powell will not have enough reasons to sound even more hawkish than some of his previous comments,” Nomura said in a note earlier this week. 

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