Recent data on the US economy and remarks by Fed Chair Kevin Warsh strengthened expectations that the Federal Open Market Committee will raise interest rates by 25 basis points at its September 15-16 meeting.
Money markets priced in a 25-basis-point increase in the Fed’s policy rate on Wednesday. In addition to the decision itself, the wording of the statement and messages delivered at the press conference after the meeting will also be important for the direction of markets.
Warsh says additional steps may be needed
Speaking at the Jackson Hole Economic Policy Symposium on August 28, Warsh said additional steps in monetary policy may be needed if inflation does not fall to its target level.
Warsh said he could not describe financial conditions as restrictive and noted that the labor market was broadly consistent with full employment. However, he said indicators related to price stability remained concerning.
Emphasizing that prices should be the Fed’s priority, Warsh said improvements in personal consumption expenditures and Consumer Price Index data did not point to a meaningful improvement in underlying trends. He said it was necessary to be confident that core inflation was moving clearly and sufficiently quickly toward the Fed’s 2% target, adding that otherwise more work would be needed.
Fed officials divided over interest rates
In July, the Fed voted 9-3 to keep its policy rate unchanged in the 3.50%-3.75% range. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan dissented, supporting a 25-basis-point rate hike.
Kansas City Fed President Jeffrey Schmid said inflation had remained stubborn and rigid. Hammack said inflation staying above target for longer would make it more difficult to bring it down again, while Boston Fed President Susan Collins said she could support a rate hike if there was insufficient evidence that inflation was declining.
Fed Governor Christopher Waller said he had seen some signs of disinflation in the latest data. Waller said he could support keeping rates unchanged in September if that trend continued.
Employment and price data support hike expectations
US nonfarm payrolls rose by 162,000 in August. The unemployment rate remained unchanged at 4.1%. Employment data for June and July were revised upward, with total employment recorded for the two months coming in 55,000 above previous estimates.
The Producer Price Index rose 0.4% month on month and 5.4% year on year in August. The Consumer Price Index also increased by 0.4% month on month and 3.4% year on year during the same period. Core inflation, which excludes energy and food prices, rose 0.3% month on month, exceeding expectations.
Padhraic Garvey, head of regional research for the Americas at ING, said the monthly increase in core inflation was higher than expected and that market expectations of tighter Fed monetary policy had strengthened. Garvey said Fed funds futures assigned an 85% probability to a 25-basis-point rate hike.
Garvey also said Warsh’s Jackson Hole messages would create pressure for a rate hike and that most FOMC members could support the move. He said markets were also pricing in further rate hikes over the coming year, but added that he did not share that expectation.
Steven Kamin, a senior fellow at the American Enterprise Institute, also said a rate hike at the next FOMC meeting was highly likely. Kamin said the labor market had remained solid and that headline and core inflation were above the Fed’s target, adding that markets were concerned about future price stability.
