The Federal Reserve’s decision to raise interest rates by another 25 basis points in July has reignited the debate over whether the central bank will continue hiking rates in the coming months to curb high inflation. FOMC Chairman Jerome Powell warned that the Fed will continue tightening monetary policy “until the job is done” by bringing inflation back down to the 2% target.
According to analysts, several data points point to the Fed sticking with its hawkish stance for now.
The latest manufacturing PMI data released this week showed solid economic activity, with the key index coming in line with expectations at 49.0 for July. While the PMI remains below the crucial 50 mark, indicating a contraction, it was an improvement over June’s reading of 46.3.
Inflation remains stubbornly high, with the consumer price index hitting a fresh 40-year high of 9.1% in June. Core CPI, which excludes volatile food and energy prices, increased 5.9% year over year – way above the Fed’s comfort zone.
The still-tight labor market, with the unemployment rate at a historically low 3.6% in June, also gives the Fed room to continue hiking rates to bring demand down. Powell has made it clear that a recession may be “necessary” to tame inflation through a drop in growth and hiring.
Taken together, these data points suggest the Fed will likely approve at least a 50 basis point increase at the September FOMC meeting. Some analysts believe a 75 basis point hike also remains possible to get borrowing costs to a neutral level this year that is neither stimulative nor restrictive.
However, a lot will depend on upcoming inflation and jobs data, as well as how rate hikes so far are impacting the economy. Any signs of significant cooling in consumer demand and pricing pressures could prompt the Fed to slow down the pace of tightening at some point. But for now, the market expects a continued aggressive approach from the central bank.