Last week, consumer inflation numbers reached their lowest annual rate in two years. The producer price index also showed a decline, increasing speculation that the Federal Reserve can successfully achieve a soft landing for the US economy, a feat rarely accomplished in previous rate hiking cycles. There is uncertainty among experts regarding the implications of the progress on inflation for the upcoming meeting of the Fed’s Federal Open Market Committee on July 25-26, as well as the likelihood of a recession. The Fed is focused on reducing inflation and considers rate hikes as its primary tool for controlling prices across the economy, which it refers to as a “blunt tool”. The market expects another interest rate hike from the Fed in July, following its decision to not raise rates in June. According to the CME Fed tracker, 96% of traders believe that the Fed will raise rates by 25 basis points, bringing the range to 5.25% to 5.50%. The Fed aims for an inflation rate of 2%, and although the recent Consumer Price Index (CPI) of 3% is close to its long-term target, some market analysts are hesitant to declare victory. Ed Yardeni, president of Yardeni Research, stated that the Fed has accomplished its mission of reaching a restrictive level of the Fed funds rate but avoids using the expression “mission accomplished” due to superstition. The stock market has been performing well, with the Dow Jones Industrial Average and the S&P 500 Index trading above their 200-day averages and close to retaking all-time highs. Market experts view the recent inflation data as indicative of a soft landing for the economy, which the Fed has been seeking. However, this does not necessarily mean that the Fed will ease up on rate hikes when it meets in July. Many experts believe that the Fed will continue to raise rates for credibility purposes and to fulfill its previous projections. There are some contrarians who argue that the Fed may be finished raising rates after the latest economic data. Liz Young, head of investment strategy at SoFi, stated that she believes there is a decent probability that the Fed might be done or prolong the pause even further due to the progress made. Former Federal Reserve Vice Chairman Roger Ferguson highlighted the increasing possibility of a soft landing for the economy but cautioned against prematurely declaring victory. Ferguson suggested that September would be a more appropriate time to assess the effects of past rate hikes. The majority of CFOs surveyed by CNBC expect a recession, despite their more positive outlook on stocks and a less aggressive Fed. They have expressed their concerns to regional Fed presidents, stating that the economy is slowing in various aspects. Pimco managing director Tiffany Wilding believes that a recession is likely, given the deceleration of growth and other factors such as credit growth slowing down. However, even in her worst-case scenario, Wilding expects a moderate recession and anticipates that the July rate hike will be the last in this cycle. San Francisco Fed President Mary Daly remains committed to lowering inflation further and is cautious about declaring victory too soon.
The Potential Mistake of Declaring Victory over Inflation Prematurely
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