Fed expected to raise rates by half a point in September as inflation declines

The Federal Reserve Building is pictured in Washington, DC, U.S. August 22, 2018. REUTERS/Chris Wattie/File Photo

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Aug 10 (Reuters) – Slowing inflation in the United States could allow Federal Reserve policymakers to scale back their most aggressive monetary tightening cycle in decades when they meet next month, although data available in the coming weeks could still be a game-changer.

After a report from the US Department of Labor showed on Wednesday that consumer prices did not rise at all in July compared to June, traders of futures linked to the Fed’s benchmark interest rate cut bets on Wednesday that the central bank would adopt a third straight 75 basis point hike. at its political meeting on September 20 and 21, and would instead opt for a half-point increase.

A Fed policymaker, while not immediately indicating a preference for a rate hike, still noted the good news.

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Wednesday’s report was the first “positive” reading on inflation since the Fed began raising interest rates in March, Chicago Fed Chairman Charles Evans said at an event in Drake University in Des Moines. He added, however, that inflation is still “unacceptably” high.

Traders now expect Fed rate hikes to peak in December at 3.25%-3.5%. Stock markets took the same lead on hopes of a less aggressive central bank, with the S&P 500 up nearly 2% by late morning.

Whether these hopes are justified will become clearer in the coming weeks. For the Fed to scale back, subsequent inflation data will need to confirm the idea that price increases are slowing.

The consumer price index rose 8.5% in July from a year earlier, according to Wednesday’s report. Although this was down from June’s 9.1% rate, prices continue to rise to levels not seen since the high inflation era of the 1970s and early 1980s. Food prices in July were up 11% over the previous year, which had a devastating effect on low-income families in particular.

For now, however, analysts have focused on the fact that after months of accelerating price pressures prompted Fed policymakers to tighten credit conditions faster than at any time since the 1980s, inflation data has finally surprised in the other direction.

“The Fed needs a lot more evidence (of slowing inflation) … but it’s a good start,” said Karim Basta, chief economist at III Capital Management. August consumer inflation data will be released on September 13, the week before the Fed meets, and given recent trends in energy and some other prices, the report “should also be supportive. to the disinflation path and should make a 50 basis point hike the preferred choice.”

Yet the Fed’s battle against high inflation is far from over.

The core consumer price index – which excludes volatility in gasoline and food prices and is considered a better predictor of future inflation – rose 0.3% from June and 5.9% compared to the previous year.

The Fed is targeting 2% inflation based on a different index that rises at a lower, but still high, rate of more than 6%.

Another measure of consumer prices compiled by the Cleveland Fed, known as the Median Consumer Price Index and considered a good view of the extent of pricing pressures in the economy, rose 6.3% on an annual basis in July, compared to 6% in June. .

“Overall, prices remain uncomfortably high,” wrote Rubeela Farooqi of High Frequency Economics, who maintained her call for a 75 basis point rate hike next month. “Coupled with strong job and wage growth, the data supports another aggressive rate hike in September.

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Reporting by Ann Saphir; Additional reporting by Howard Schneider; Editing by Toby Chopra and Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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