Federal Reserve policy makers like to claim they are “data dependent” when it comes to monetary policy decisions, but this month they have run out of consequential economic releases on the calendar to change their minds. That should more or less seal the fate of interest rates for the rest of the summer, with less than two weeks to spare before the Federal Open Market Committee meets again to discuss the federal funds rate.
When they convene on July 26-27, FOMC voters are now likely to raise interest rates by 75 basis points to a range of 2.25% to 2.5%, matching last month’s jumbo-sized hike, the largest in nearly three decades. That will be remembered as a historically massive and appropriate step toward curbing the worst inflation in four decades, but consumer prices are increasing so fast in the US that Wall Street had started to wonder if even that was enough. Mercifully, it now looks as if the Fed will stick with the original plan, and that’s a good thing. Too much improvising is only going to leave households and investors with the impression that the central bank is becoming desperate.
A report on consumer prices published Wednesday showed inflation rose even higher, driven by broad-based factors above and beyond elevated energy prices, many of which won’t go away easily without central bank intervention. After that, traders started bracing for a potential 100-basis-point increase that would have put the central bank in uncharted territory in the modern era of fed funds targeting, which began in 1994.
There are several reasons that probably won’t happen, barring some unforeseen shock. First, Fed speakers who have weighed in on the matter since the report have gravitated toward a 75-basis-point increase. Among those who left the door open to going higher, both Cleveland Fed President Loretta Mester and Federal Reserve Board Governor Christopher Waller cited outstanding data on retail sales and inflation expectations as factors that could still change matters. Both arrived Friday morning in the form of a middling, albeit better-than expected, retail sales number and a very encouraging survey on consumer inflation expectations. The Fed is likely to see the latter as more consequential; it showed that median five-to-10 year inflation expectations plummeted to 2.8%, the lowest since July 2021.
Second, the Fed enters it traditional blackout period Saturday, which bars public comments starting 10 days before a meeting. With market expectations now having coalesced, the Fed has run out of time to communicate any changes in its thinking. After late-breaking data prompted the Fed to pivot during last month’s quiet period, central bankers won’t want to disquiet markets again. Central bankers don’t like to create unnecessary volatility, or so they say.
If there’s one wild card, it’s housing data, which Waller also mentioned in his remarks on Thursday. But the public already has a taste of that in the form of bad-but-not horrendous transaction data from Zillow and other providers. Transaction volumes are falling, but home values are still increasing amid a supply shortage. What’s new will be data on Tuesday on housing starts and building permits, an important data set for a Fed that wants to cool demand without exacerbating the inventory problem. Still, it’s almost impossible to imagine a shock in that number causing the Fed to alter course.
Ultimately, this leads to the conclusion that the Fed will stick with 75 basis points, and that’s good. Stunning the market now would give investors and consumers the impression that the Fed is far behind in the inflation fight, befuddled by the incoming data and effectively improvising a solution to the worst inflation since 1981. Sadly, those things may actually be true: Led by Chair Jerome Powell, the Fed repeatedly made excuses for inflation throughout 2021, allowing price pressures to spread unmitigated. But against all odds, market-implied inflation expectations show the Fed still has its credibility, and throwing out its playbook now would imperil that key asset in the battle against soaring prices.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Jonathan Levin
