The Federal Reserve might be close to the end of its tightening cycle after more than a year of at times aggressive rate revisions, as signs indicate that inflation is coming down.
Thursday’s producer price index, which measures wholesale prices, showed that inflation came in at just 0.1% for the year ending in June. A day before, the June release of the even-more-closely-tracked consumer price index showed inflation falling to a 3% annual rate, representing a decline of a whole percentage point from the preceding month.
NEW INFLATION READINGS A WIN FOR BIDEN AMID 'BIDENOMICS' PUSH: 'ECONOMIC MIRACLE'
Both reports were lower than what most economists had expected them to be — good news for the economy that has been struggling with rising price pressures for about two years.
It is now more likely that the Fed will only raise rates one more time this year, signaling the end of the central bank’s historic quest to crush the country’s worst inflation in nearly two generations.
“This pair of inflation readings not only came in better, but they both came in better than expected,” Mark Hamrick, a senior economic analyst at Bankrate, told the Washington Examiner. “That means that the war against inflation is now going a little better than it had been going.”
NEW INFLATION READINGS A WIN FOR BIDEN AMID 'BIDENOMICS' PUSH: 'ECONOMIC MIRACLE'
The Fed paused rate hikes for the first time at its June meeting, a move that was widely telegraphed beforehand. At the same meeting, though, Fed officials gave economists a bit of a surprise in that they indicated there would be two more rate hikes this year. Basically, the Fed paused in order to assess the effects of the yearlong barrage of rate hikes on the economy — not to signal an end to its tightening cycle.
It is almost a certainty that the Fed will hike its target rate by a quarter of a percentage point later this month, but with the latest PPI and CPI readings, many Fed watchers and most investors now bet that the July rate hike will herald the end of its tightening cycle.
The current rate target is 5% to 5.25%, and investors expect this year’s terminal rate will end up being 5.25% to 5.50%.
Quincy Krosby, the chief global strategist for LPL Financial, contends the recent inflation report makes it increasingly likely that the Federal Open Market Committee will pause after its July hike.
She said, though, some on the FOMC might push for an “insurance” hike in September given high core inflation (which strips out volatile food and energy prices) and that during the last inflationary plague of the 1970s, the Fed paused too soon and inflation ticked back up.
“The PPI report, coupled with downward revisions for the two previous months, has helped underscore that the Fed could be prepared to deem a July 26 rate hike as a ‘one and done,’” Krosby said. “The ‘insurance’ rate hike that may be needed by the more hawkish side of the FOMC may ultimately win out, but all market indicators are pointing to a Fed that is moving closer to the end game.”
And investors overwhelmingly think July’s expected rate revision will be the last for Fed Chairman Jerome Powell and the FOMC.
Investors now assign just about a 13% chance that the Fed will conduct another interest rate hike at its September meeting, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
That is down from a quarter of investors predicting at least two rate hikes a week ago, prior to the release of the inflation reports.
“It’s a relatively safe assumption to say that there’s a possibility that the Fed could be done raising rates after the July meeting in which they are expected of course to raise rates,” Hamrick said.
Nevertheless, he added that Fed officials will have an open mind about the future and will base their policy on whatever economic developments and reports come down the line between the July meeting and the September meeting.
The rate hikes have affected credit cards, mortgages, investments, and savings.
Mortgage rates rose when the Fed hiked its target interest rate (which is a different, very short-term rate). That has resulted in homes being less affordable — the average rate on a 30-year, fixed-rate mortgage was 6.96% this past week, according to Freddie Mac, up from closer to 3% when the Fed started to move toward rate hikes early last year.
Higher interest rates also make it more costly to borrow and pay back money on credit cards. As rates rise, so does the annual percentage rate on credit cards. Average APRs have soared from around 15% to above 20% over the course of the cycle, according to the Fed.
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In the interim between the two meetings, there will be several key economic reports, including inflation data for both July and August, making guessing about a pause this far out quite challenging. Powell and other officials have emphasized that they will conduct monetary policy based on what the data show.
“On net, less inflation and signs that core inflation will slow near-term suggest the Fed’s expected hike at the end of this month will probably be the last of the cycle,” said Bill Adams, the chief economist for Comerica Bank. “Things could still go wrong if another shock … exerts new upward pressure on prices. But with the U.S. economy slowing and a modest margin of slack opening in its productive capacity, that seems less of a risk than it did up until now.”