All Eyes on FOMC Meeting Next Week Amid Hot Inflation

All Eyes on FOMC Meeting Next Week Amid Hot Inflation

Federal Reserve officials have indicated they are gravitating toward another 0.75-percentage-point rate rise at their July 26-27 Federal Open Market Committee meeting, even as they have faced questions about their willingness to do more than that to bring down high inflation. Central bankers have signaled they will do whatever it takes to lower inflation that is now running above 9%.

Consumer prices are soaring at their fastest rate in a generation, climbing 8.6% in June from a year earlier in the face of rising energy and food costs. Nearly every corner of the globe has been hit by inflation in recent months. Our Tom Lee, Head of Research, believes inflation is already rolling over, but the big CPI figure remains hot. Meanwhile, median U.S. home prices notched a new record high of $416,000.

To review:

  • Inflation rose 9.1% in June, the highest reading since 1981
  • The national average for gasoline topped $5 a gallon for the first time
  • 33% of listed homes have cut their prices
  • Home builder confidence fell to the lowest levels since May 2020
  • 30-year mortgage rates hit 5.8%, the highest since 2008
  • Industrial production fell 0.2% in June
  • Construction on housing starts fell to a 9-month low
  • Small business optimism fell to the lowest levels in the last decade
  • ISM manufacturing PMI fell to the slowest growth since June 2020
  • Record numbers in credit card usage

As for Fed/inflation impact on markets, the big question is: What’s priced in?

The Fed’s likely move next week would raise the federal funds rate to between 2.25% and 2.5%, which would still be at least 6 percentage points below the current headline rate. The Fed’s latest quarterly economic predictions show the FOMC expects the federal funds rate to be at 3.4% by year-end, while inflation is expected to be at 5.2% by year-end, down from 9.1% currently.

On Friday, a University of Michigan survey showed that consumers see inflation running at 2.8% over a five-year horizon, down from an expected 3.1% in June. But inflation is still running at a four-decade high, and Fed Chair Jerome Powell and Co. are at risk of losing their credibility. Powell did recently admit  that the U.S. central bank underestimated the pace of consumer-price rises and was wrong about calling it "transitory." He also repeatedly said the economy, thanks to a hot labor market, is strong, which is why many market participants predicted a 100 basis-point (one percentage point) hike in July.

The Fed’s current target is to get the federal funds rate to a longer-run neutral rate of 2.5%, but minutes of the last FOMC meeting show that officials plan for rate increases that would take the rate to 3.4% this year.

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