The US Federal Reserve is unlikely to back away from its hawkish rate hikes, despite positive signs this week that market strategists believe US inflation may be slowing.
On Thursday, July’s producer price index surprisingly fell 0.5% from the previous month, compared with an estimated 0.2% rise, according to a Dow Jones survey. On an annual basis, the index rose 9.8%, the lowest rate since October 2021.
This was followed by encouraging data showing consumer prices rose 8.5% in July. The rate was slightly lower than the 8.7% expected by analysts polled by Dow Jones, slowing from the previous month.
As both CPI and PPI weaken, markets have started to moderate their expectations for Fed rate hikes. Still, the positive data doesn’t mean the Fed is “mission complete,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors.
“If you remove some of the headline noise, some of the… CPI, even PPI [numbers] are still showing upward pressure,” he told CNBC’s Squawk Box Asia on Friday. “The Fed cannot finish here. That likely means the 75 basis point rate hike stays on the table.”
“Fed fund futures and euro-dollar futures pricing shows we are still closer to the 75 basis point rate hike. And I think that’s because of the guidance that all these Fed spokesmen keep giving us – ‘just, ‘Don’t be complacent here, we’re going to move on,'” Emons added.
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Last week, St. Louis Federal Reserve Chairman James Bullard said the central bank will keep raising interest rates until it sees convincing evidence that inflation is coming down.
This message jibes with other Fed spokespeople, including Regional Presidents Loretta Mester of Cleveland, Charles Evans of Chicago and Mary Daly of San Francisco. They all recently pointed out that the inflation battle is far from over and further tightening of monetary policy will be required.
“Not Enough Evidence”
The Fed raised interest rates by 0.75 percentage points in both June and July — the largest consecutive hikes since the central bank began using interest rates as its primary policy tool in the early 1990s.
Victoria Fernandez, chief market strategist at Crossmark Global Investments, said the Fed is far from slowing down given the latest data and is becoming dovish on rate hikes.
“For me, there isn’t enough evidence for the Fed to make a big swing from there. I still think they’re considering 50, 75 basis points at the September meeting,” she told CNBC’s Street Signs Asia on Friday.
“Nothing coming out of CPI or PPI economic reports in today’s session will change that at this point. I think we still have a significant way to go,” she added.
Investors will be turning to Fed Chair Jerome Powell for advice on what the Fed might do at its next meeting in September.
Inflation still sticky
Fernandez stressed that the thornier parts of inflation, like pressure on wages and rents, are still high. These would not decline at the same rate as energy, oil and gasoline components, she said.
Inflation data in the next CPI report in September will be crucial for markets, she added.
“If those show us that we’re actually plateauing or starting a downtrend, then I think the Fed might come back a little bit to 50 basis points,” she said. “If it doesn’t show that, or if it even goes a little higher because of some stickier components, then I think you’re right back at 75 for the meeting,” Fernandez said.
The Federal Open Market Committee does not meet in August when it will hold its annual symposium in Jackson Hole, Wyoming.
Powell could use this opportunity to update markets on the upcoming path to tightening, Medley Global Advisors’ Emons noted, adding the Fed understands that price pressures are so “stubborn and persistent that they don’t can really retreat”.
“You shouldn’t underestimate Jackson Hole. Some people dismiss it – that it’s not the platform. But he could very well take the stage and should at least reiterate that the Fed really is on this mission to really bring inflation down. That’s the main goal.”
– With reports by CNBC’s Jeff Cox.