Fed Seen Being Aggressive For Longer After U.S. Inflation Surprise
U.S. inflation is stubbornly high and broad-based, increasing the odds the Fed will stick with its aggressive tightening campaign.
(Bloomberg) -- Federal Reserve officials are under fresh pressure to extend rather than slow down their aggressive interest-rate increases after US inflation came in hotter than forecast for August, potentially putting a fourth-straight 75 basis-point increase on the table.
While cheaper gasoline held US headline consumer inflation to a 0.1% advance in August from the prior month, the core measure that excludes volatile food and energy prices jumped 0.6% -- double economists’ expectations, Labor Department data showed Tuesday.
That suggests inflation is stubbornly high and broad-based, increasing the odds the Fed will stick with its aggressive tightening campaign for longer than anticipated.
“This is a concerning report across the board for the Fed,” said Robert Dent, senior US economist at Nomura Securities. “Not only does this lock in a 75 basis-point hike in September, it likely raises the risk of another 75 basis-point hike at the November FOMC meeting,” he said, referring to the Federal Open Market Committee.
Investors now fully expect the Fed will lift its benchmark interest rate by 75 basis points for the third consecutive time when it meets Sept. 20-21. Bets increased that it will deliver the same size move again in November, and investors now project the tightening cycle peaking around 4.28% in April.
Fed officials are working to quickly move rates into restrictive territory, a level at which policy is slowing economic activity and not stimulating demand. The consumer price index, which landed during the central bank’s pre-meeting blackout period, is one of the last major economic reports officials will receive before they gather next week.
“Today’s CPI report increases the odds that the Fed hikes by at least another 100 basis points over the November-to-December time frame,” said Neil Dutta, head of US economic research at Renaissance Macro Research LLC. “This takes the federal funds rate above 4% by year end.”
Some officials had already signaled they would support another big move this month. St. Louis Fed President James Bullard said in an interview with Bloomberg News on Thursday that he was “leaning more strongly” toward a 75 basis-point increase.
Chair Jerome Powell and his colleagues have said their rate decision will be based on the “totality” of the economic data. An improvement in consumer sentiment figures and a surprise pickup in job openings also point to resilient households and consistently strong labor demand.
“We haven’t seen a tremendous amount of slowing in the real economy, and that keeps these super-sized rate hikes in play,” Jay Bryson, global economist at Wells Fargo & Co., said on Bloomberg Television.
Policy makers have said they would like to see inflation slow for several months before they ease off on tightening. The CPI report could bolster the argument of hawks on the FOMC that they have to do more to temper demand and help cool price growth.
While the Fed targets a different measure of inflation known as the personal consumption expenditures price index, and aims for 2% over the medium term, officials review the CPI data for guidance on where prices are headed.
“Until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy,” Fed Governor Christopher Waller said Friday, after declaring that he supported “another significant increase” for this month.
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