To look at what’s next for the Fed and the US economy it is important to analyse the Fed’s reasoning behind its actions. For this, Fed Chairman Jay Powell’s press conference following the announcement is always more informative and interesting than the official statement.
Powell’s dilemma is obvious. But he addressed it in his comments after the official Fed announcement. Inflation is still not close to the Fed’s goal of 2%. Headline inflation is 4%. That is at least double as high as the target rate the Fed is looking for. The Fed is also more focused on core inflation (excluding food and energy) because of the higher volatility in food and energy prices. The 5.3% core inflation rate represents progress, but it is still far cry from the Fed’s goal of 2% and sits persistently around this level. But the Fed also faces the risks of recession and higher unemployment as a real thread. Addressing inflation, Powell said, “Inflation remains well above our 2% goal… The process of getting inflation back down below our 2% goal has a long way to go… Core PCE… you’re just not seeing a lot of progress.”
The Fed also considers highly the rate of unemployment as a signal for when a real pause in interest rates might begin. Powell’s comments were hawkish: “The labour market remains very tight… Labour demand still substantially exceeds the supply of available workers.” These and other remarks strongly indicated that more rate hikes lie ahead, possibly as early as the July 26 meeting. The other members of the FOMC share Powell’s hawkish views, some are even more extreme. 4 members of the SEP group expect 2 more rate hikes this year. 2 members expect 3 more rate hikes this year.
The skip buys time. The Fed will probably consider data from June, July, and August before they will make their next rate decision on September 20. Getting that data would be consistent with Powell’s description of Fed decision-making being data-dependent. Powell stsated: “We didn’t make a decision about July… As we watch, we’ll see what’s happening.”
The Fed is confronted with a severe dilemma. On one hand, there is progress on inflation, but still too high and too persistent hovering above the 5% core level. So, further rate hikes will be needed to bring inflation down. But this could cause a recession and higher unemployment, a price Powell is prepared to pay. Powell’s opinion: “The committee is completely unified in our determination to bring inflation down to 2%… The committee will do whatever it takes.”
Sven Franssen