Lower inflation raises hopes of US rate hike relief

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Softening US inflation has raised the prospect that an interest rate hike by the Federal Reserve expected later this month will be the last step in its historic monetary tightening campaign.

The lower-than-expected rise in prices reported by the Bureau of Labor Statistics on Wednesday showed a welcome respite to sources of inflation that had proved persistent.

“Core” inflation, which strips out volatile food and energy prices, posted a monthly rise of just 0.2 percent in June, the smallest increase in nearly two years. Annual headline inflation is now running at 3 per cent, its slowest pace since March 2021.

Despite the consumer price index data, the Fed is still widely expected to proceed with another quarter-point interest rate hike at its next policy meeting later this month, after skipping an increase last month. Is. But economists now see the likelihood that the central bank will need to raise borrowing costs beyond that point.

“Inflation is going to be a little higher in the second half of the year,” said Andrew Schneider, US economist at BNP Paribas. They expect a rate hike in July to be the last of the Fed’s tightening cycle. That means the federal funds rate is set to top 5.25-5.5 percent, a level he anticipates the central bank will maintain at least through the early part of next year.

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Traders are also now confident that the central bank will hold off on raising interest rates after this month’s meeting, according to the fed funds futures market after June’s inflation data.

Holding off on raising rates beyond July would mark a deviation from projections the Fed published in June, which showed most of its policymakers forecast two more quarter-point rate hikes this year. Chairman Jay Powell last month described that trajectory as “a pretty good estimate of what will happen,” but stressed that the Fed would closely monitor incoming data when determining its next policy steps.

Lael Brainard, director of the National Economic Council at the White House and former Fed vice chairman, was upbeat about the inflation data and the broader US economy.

“The economy is defying forecasts that inflation will not come down without significant job destruction,” he told the Economic Club of New York on Wednesday.

He said annual CPI growth was down for 12 consecutive months, close to the pre-financial crisis average and the lowest among G7 countries. He said, meanwhile, the labor market was “in better balance” than it was earlier this year.

For Omar Sharif, president of forecast group Inflation Insights, what will give the Fed the “gunpowder” to hold off on rate hikes in September and beyond is not only being prepared to maintain a more moderate monthly pace of core inflation, but It is also that prices will rise as more spending categories are being relaxed in goods and services.

Sharif said core inflation is likely to average only 0.2 per cent each month in July, August and September.

“If that forecast comes to fruition, then the Fed is getting what they wanted to see, (which is) a series of readings showing you that the core numbers are actually coming out and the breadth of deflation has actually improved.” is,” he said. ,

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A complicating factor is that the policy-making Federal Open Market Committee remains divided, with more hardline voting members such as the Dallas Fed’s Lori Logan and Governor Christopher Waller still primarily concerned about rising inflation risks.

Logan recently admitted she would favor a rate hike in June as she described the economic data as “pretty warm” and indicated the housing market had hit a “bottom.”

Diana Amoa, chief investment officer at Kirkoswald, said she expects the Fed to keep all options open after its July meeting, citing concerns about inflationary pressures amid a firming labor market and a more positive outlook to boost market expectations. About warned the authorities that they will soon cut interest rates. ,

“They may not actually be very clear that they have come to the end of the hiking cycle as markets struggle with pricing in longer rates,” he said. “They will continue to rely on the data and continue to indicate that they need inflation on target.”

Additional reporting by James Politi in Washington

Get free US inflation updates

we will send you one myFT Daily Digest Latest Email Rounding US inflation News every morning.

Softening US inflation has raised the prospect that an interest rate hike by the Federal Reserve expected later this month will be the last step in its historic monetary tightening campaign.

The lower-than-expected rise in prices reported by the Bureau of Labor Statistics on Wednesday showed a welcome respite to sources of inflation that had proved persistent.

“Core” inflation, which strips out volatile food and energy prices, posted a monthly rise of just 0.2 percent in June, the smallest increase in nearly two years. Annual headline inflation is now running at 3 per cent, its slowest pace since March 2021.

Despite the consumer price index data, the Fed is still widely expected to proceed with another quarter-point interest rate hike at its next policy meeting later this month, after skipping an increase last month. Is. But economists now see the likelihood that the central bank will need to raise borrowing costs beyond that point.

“Inflation is going to be a little higher in the second half of the year,” said Andrew Schneider, US economist at BNP Paribas. They expect a rate hike in July to be the last of the Fed’s tightening cycle. That means the federal funds rate is set to top 5.25-5.5 percent, a level he anticipates the central bank will maintain at least through the early part of next year.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

Traders are also now confident that the central bank will hold off on raising interest rates after this month’s meeting, according to the fed funds futures market after June’s inflation data.

Holding off on raising rates beyond July would mark a deviation from projections the Fed published in June, which showed most of its policymakers forecast two more quarter-point rate hikes this year. Chairman Jay Powell last month described that trajectory as “a pretty good estimate of what will happen,” but stressed that the Fed would closely monitor incoming data when determining its next policy steps.

Lael Brainard, director of the National Economic Council at the White House and former Fed vice chairman, was upbeat about the inflation data and the broader US economy.

“The economy is defying forecasts that inflation will not come down without significant job destruction,” he told the Economic Club of New York on Wednesday.

He said annual CPI growth was down for 12 consecutive months, close to the pre-financial crisis average and the lowest among G7 countries. He said, meanwhile, the labor market was “in better balance” than it was earlier this year.

For Omar Sharif, president of forecast group Inflation Insights, what will give the Fed the “gunpowder” to hold off on rate hikes in September and beyond is not only being prepared to maintain a more moderate monthly pace of core inflation, but It is also that prices will rise as more spending categories are being relaxed in goods and services.

Sharif said core inflation is likely to average only 0.2 per cent each month in July, August and September.

“If that forecast comes to fruition, then the Fed is getting what they wanted to see, (which is) a series of readings showing you that the core numbers are actually coming out and the breadth of deflation has actually improved.” is,” he said. ,

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

A complicating factor is that the policy-making Federal Open Market Committee remains divided, with more hardline voting members such as the Dallas Fed’s Lori Logan and Governor Christopher Waller still primarily concerned about rising inflation risks.

Logan recently admitted she would favor a rate hike in June as she described the economic data as “pretty warm” and indicated the housing market had hit a “bottom.”

Diana Amoa, chief investment officer at Kirkoswald, said she expects the Fed to keep all options open after its July meeting, citing concerns about inflationary pressures amid a firming labor market and a more positive outlook to boost market expectations. About warned the authorities that they will soon cut interest rates. ,

“They may not actually be very clear that they have come to the end of the hiking cycle as markets struggle with pricing in longer rates,” he said. “They will continue to rely on the data and continue to indicate that they need inflation on target.”

Additional reporting by James Politi in Washington