The Federal Reserve is unlikely to deviate from its hawkish interest rate hikes despite positive signs this week that US inflation could ease, market strategists say.
On Thursday, the producer price index surprisingly fell 0.5% in July from the previous month, against an estimate of a 0.2% gain, according to a Dow Jones survey. On an annual basis, the index rose 9.8%, the lowest rate since October 2021.
This followed encouraging data that showed consumer prices rose 8.5% in July. The rate was slightly lower than the 8.7% expected by analysts polled by Dow Jones and a slowing pace from the previous month.
As the CPI and PPI soften, markets have started to moderate their expectations for Fed rate hikes. Still, the positive data doesn’t mean “mission over” for the Fed, said Ben Emons, managing director of global macro strategy at Medley Global Advisors.
“If you remove the noise from the headlines, some of the… CPI, even PPI [numbers] still showing upward pressure,” he told CNBC’s “Squawk Box Asia” on Friday. “The Fed can’t be done here. That likely means the 75 basis point rate hike remains on the table.”
“The pricing of fed funds futures and euro-dollar futures shows that we’re even closer to the 75 basis point rate hike. And I think that’s because of the advice that all these Fed speakers keep giving us – “just don’t get complacent here, we’ll keep going,” Emons added.
Last week, St. Louis Federal Reserve Chairman James Bullard said the central bank would continue to raise rates until it sees compelling evidence that inflation is falling.
This message is consistent with other Fed speakers, including regional chairs Loretta Mester of Cleveland, Charles Evans of Chicago and Mary Daly of San Francisco. All have recently indicated that the fight against inflation is far from over and that further tightening of monetary policy will be necessary.
“Not enough evidence”
The Fed raised its benchmark rate by 0.75 percentage points in June and July – the largest consecutive increases since the central bank began using the funds rate as its main monetary policy tool in the early 1990s. .
Victoria Fernandez, chief market strategist at Crossmark Global Investments, said the Fed was far from braking and getting dovish on rate hikes given the current data.
“To me, there’s not enough evidence for the Fed to make a huge pivot from where they are. I still think they’re looking at 50, 75 basis points at the September meeting” , she told CNBC’s “Street Signs Asia” on Friday.
“Nothing coming out of the CPI or PPI economic reports in today’s session will change that at this point. I think we still have a long way to go,” she added.
Investors will be awaiting guidance from Fed Chairman Jerome Powell on what the Fed might do at its next meeting in September.
Inflation still sticky
Fernandez pointed out that the stickiest parts of inflation, such as wage and rent pressures, are still elevated. These are not declining at the same rate as the energy, oil and gasoline components, she said.
Inflation data in the upcoming CPI report in September will be critical for markets, she added.
“If that shows us that we’re actually plateauing or starting a downtrend, then I think the Fed is maybe going back to 50 basis points a little bit,” she said. “If it doesn’t show, or if it even increases a bit based on some stickier components, then I think you’re back to 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 inform markets on the way forward for monetary tightening, noted Emons of Medley Global Advisors, adding that the Fed understands that price pressures are so “tenacious and sticky that it cannot not really step back”.
“You shouldn’t underestimate Jackson Hole. Some people dismiss him – that it’s not the platform. But he just might take center stage and should at least re-emphasize that the Fed is really in the business of doing really get inflation down. That’s the key objective.”
– With reporting by CNBC’s Jeff Cox.