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Federal Reserve chair Jay Powell reaffirmed the bank’s commitment to quell persistently high inflation in the US economy, following a recent interest rate hike. Despite the stern warning, economists and investors remain largely unconvinced and expect this rate increase to be the last in the current cycle. The chief US economist at Morgan Stanley, Ellen Zentner, believes that various factors, such as a slowing consumer, job market, and inflation, align with their expectations and support the view that this is the final hike in the cycle.
Powell emphasized that the Federal Open Market Committee would carefully evaluate new economic data before making further decisions on tightening measures. While additional rate increases are possible, they are not guaranteed. Economists predict that inflation will continue to decrease over the next few months, making it harder for the Fed to justify further hikes unless payroll growth shows sustained improvement. Moreover, experts like Tiffany Wilding of Pimco expect labor demand and economic activity to be negatively impacted by previous rate increases and tighter credit conditions, which further diminishes the likelihood of additional rate hikes this year.
Despite the generally cautious sentiment, some economists like Jonathan Pingle of UBS warn against premature assumptions of future monetary policy decisions. Given that core inflation still exceeds the central bank’s 2% target, it remains too early to signal the end of rate increases. Powell also highlighted the risk of higher inflation resulting from the enduring strength of the US economy, which has remained resilient even with the Fed’s efforts to cool down demand through high borrowing costs. However, improved economic outlook and the absence of recession forecasts indicate positive developments for the Fed’s goal of curbing inflation without causing a major economic downturn.
Powell also warned that stronger economic growth could lead to higher inflation in the long run, necessitating appropriate monetary policy responses. Additionally, Oxford Economics economists identified other potential shocks, such as a possible increase in US food prices caused by the El Niño weather phenomenon. Despite the differing opinions, Benson Durham, head of global policy at Piper Sandler, believes that the Fed may ultimately be obligated to raise rates further based on the available data, aligning with the projections officials made in June.
However, amidst these uncertainties, Morgan Stanley’s Zentner cautioned that the coming months may be tumultuous. Turning points are challenging to navigate and communicate, often leading to market volatility. Analysts will closely dissect upcoming data points to gain a clearer understanding of the situation.
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