Inflation has eased more than previously expected, US inflation data for June revealed. Although the Fed’s declared two percent target has not yet been reached, market participants are now increasingly asking whether the central bank will stick to its planned interest rate hikes – or whether it will take another interest rate pause.
• US inflation falls more than expected in June
• rate hike still very likely in July
• Further rate hikes by the Fed with question marks
US inflation data for the month of June has triggered a rally in the stock markets. The data revealed a fall in inflation to 3.0 percent, a far sharper fall than previously expected. They even fell to their lowest level in more than two years. Meanwhile, core inflation (excluding energy and food) was 4.8 percent, also down from the previous month and also lower than expected.
The US stock markets reacted immediately with relief, which continued on the following day after the US producer prices published a day later confirmed the downward trend.
The surprisingly strong decline in inflation has fueled the guesswork surrounding the further monetary policy strategy of the US Federal Reserve. Although the inflation data is still above the Fed’s two percent target, the declining trend is clearly recognizable.
Rate hike in July a foregone conclusion
The next Fed rate meeting is on July 25th and 26th. However, market consensus remains that there will be another 25 basis point rate hike here. What is much more uncertain, however, is which strategy the central bank will then aim for. So far, based on various statements by the central bankers, it has been assumed that after the interest rate hike in July there will be another one in 2023.
Fed Director Waller recently reiterated this. The expert said in a speech in New York that inflation in the US is still not under control, which is why he supports two further interest rate hikes this year by 25 basis points each: “I see no reason why the first of these two interest rate hikes should not be made at our meeting later this month,” he was quoted as saying by Reuters. However, Waller did not want to be pinned down exactly when the second rate hike would take place, even if he personally would prefer another hike sooner rather than later: “But this decision will only be made in the future.” After all, the June data would only show a snapshot, but would not already indicate a trend. After all, there was also a moment in the summer of 2021 when price pressure eased, only to pick up even more afterwards.
Economists disagree over Fed action
However, other economists are not so sure that a second rate hike should actually be necessary. Jefferies economist Thomas Simons told Yahoo Finance, “We don’t have strong beliefs about what the Fed is likely to do in September and beyond.” Citigroup’s Veronica Clark and Andrew Hollenhorst remain optimistic about a July hike, but could see a planned September hike being pushed back to November given the new data, according to Yahoo Finance.
Wells Fargo analyst Sarah House, on the other hand, believes that there will be no further rate hike by the Fed after July’s rate hike. In her view, however, investors should bid farewell to the idea of interest rate cuts in the near future: “Given the fact that the underlying trend suggests that inflation is likely to linger at 3 percent rather than 2 percent, we think it’s a long way to go to rate cuts,” House said, according to Yahoo Finance.
As the Nobel Prize winner and economic expert Christopher Pissarides explained to the US broadcaster CNBC, in his view there was no reason for the Fed to keep tightening the interest rate screw: “It will take time for this [geldpolitischen Werkzeuge der Fed, Anmerk. d. Red.] develop their full effect. Given that inflation is moving in the right direction and interest rates are high, I would wait and see what happens next,” Pissarides told Street Signs Europe after the US inflation data for June was released .
Jeremy Siegel, on the other hand, believes that the July hike should be a done deal regardless of the latest data, while any hikes thereafter should again depend on future data. For this reason, investors should keep a close eye on the consumer price index. In addition, data on the development of GDP in the second quarter are also important sources of information. Personally, if he were in the Fed’s position, he would not hike rates again as he sees no signs of inflation picking up again. Instead, he sees “stability”: “Oil has found its footing, commodity indices have stabilized somewhat, the real estate market has stabilized. I don’t see a major upward trend in inflation,” Siegel said, according to CNBC.
However, it remains to be seen how the Fed will ultimately decide.
Editorial office finanzen.net