The Fed skips a round: no hike in June, eyes on July for the new hike

The Federal Reserve has decided to skip a shift. Instead of a pause for reflection, after fifteen months of rate hikes, a “skip” was opted for during the June meeting. A significant persistence of inflation still weighs, falling less than expected, but above all the solidity of the labor market. But this decision, as financial analysts suggested on the eve, does not mean that the Fed’s path can be defined as concluded. As early as July there could be a new increase in the cost of money by 25 basis points. We’ll see.

The forecasts of the 109 economists polled by Bloomberg were clear. 100 saw a slowdown in rate hikes, 8 saw an increase, only one economist suggested a cut. For June, therefore, the premises have been maintained. The Federal Open Market Committee (FOMC), the operating arm of the Federal Reserve, has decided to take a moment to understand the most appropriate path to counter the flare-up in consumer prices. In May, the contraction was evident, bringing the general index back to around 4.00%. And it is therefore possible that future indications are for a partial slowdown in the process of normalizing monetary policy after a decade of low, if not negative, rates. UBS chief economist Paul Donovan was clear. US May consumer price data helps argue against further rate hikes. There is no evidence that prices need to be sticky. Six of the eleven metropolitan areas that have reported inflation have a rate of less than 3.5% on an annual basis,” he explained. At the same time, “the prices of durable goods (the first, transitory wave of inflation) remain in deflation”. The general impression is that, in the absence of a stabilization of the prices of both general inflation and core inflation (net of energy and food, ed), we will have to continue with the increases.

The Fed has decided to wait, but is keeping its eyes peeled. “Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months and the unemployment rate has remained low. Inflation remains high,” explains the press release issued. The US banking system “is solid and resilient”. And it is “probable that more restrictive credit conditions for households and businesses will weigh on economic activity, hiring and inflation”. The extent of these effects, however, remains ‘uncertain’. And it is for this reason that the FOMC, it is underlined, “remains very attentive to the risks of inflation”.

The fear of excessive tightening does not seem to be the basic one according to a large part of analysts. As in the case of Blerina Uruci, T. Rowe Price’s US chief economist. “I believe that the risks of an increase in the federal funds rate to 6% (from the current level of 5.00%-5.25%, ed.) or beyond are limited,” Uruci points out. One aspect of the labor market data, she points out, may explain why: «In the last year, those who changed jobs benefited from higher wage inflation than those who remained stationary, due to the high turnover . The wage inflation of those who change jobs is higher than that of those who stay during the recovery phases, but this time the gap is greater. However, as the number of people leaving work compared to those who lose it has decreased, “I expect this will lead to a slowdown in wage inflation which will put some downward pressure on services inflation”. As a result, the chances of the Fed cutting interest rates this year “is limited, given that both core goods and services inflation remain above the long-term trends that allowed the Fed to keep inflation constantly below its target». A task that could slow down the return to normality for the US central bank.

Jeffrey Cleveland, chief economist of Payden & Rygel, has few doubts about the direction the Fed will take. “In our opinion,” today’s jump will not be considered as the end of the cycle of rate hikes, especially due to inflation, “he explains. The problem for policymakers is to understand the correct price formation dynamics also in view of seasonality. “May’s new Core Inflation figure of 0.4% month over month means six straight months of monthly data at 0.4% and above,” Cleveland notes. Who notes that, after the “skip” in June, there may be a new path for Powell. “We even see a risk of a next 0.50% hike, due to potential rebounds in the used vehicle and travel categories (both fell in April), which tend to be highly volatile,” he points out. Other categories, according to the expert, “could help keep core inflation too hot for the tastes of the Fed. For example, medical services have been a significant brake on inflation since last fall, but now this brake seems to be failing.”

A few weeks ago, Fed Board member Christopher Waller stated with certainty that the journey is not over yet. «I don’t expect the data for the next two months to make it clear that we have reached the terminal rate. And I am not in favor of halting rate hikes unless there is clear evidence that inflation is falling towards our 2% target,” he remarked. If there were no clear signs of attenuation of the price flare-ups, the June one could prove to be just a detour in a much longer and perilous journey than the forecasts of a few months ago.