Fed expected to stick with hawkish rate hikes until data show further slowing in inflation

KEY POINTS

The Federal Reserve is unlikely to pivot from its hawkish interest
rate hikes despite positive signs this week that inflation in the U.S.
could be easing, according to market strategists.
As both CPI and PPI soften, markets have started to moderate their
expectations for Fed rate hikes.
But that doesn’t mean it is “mission complete” for the Fed, said Ben
Emons, managing director of global macro strategy at Medley Global
Advisors.
Victoria Fernandez, the chief market strategist at Crossmark Global
Investments, said the Fed is nowhere near putting the brakes and
turning dovish on rate hikes, given the current data.

The Federal Reserve is unlikely to pivot from its hawkish interest
rate hikes despite positive signs this week that inflation in the U.S.
could be easing, according to market strategists.

On Thursday, the producer price index surprisingly fell 0.5% in July
from the prior month, compared with an estimate of a 0.2% gain,
according to a Dow Jones survey. On an annual basis, the index rose
9.8%, the lowest rate since October 2021.

That followed encouraging data that showed consumer prices rose 8.5%
in July. The rate was slightly cooler than the 8.7% expected by
analysts surveyed by Dow Jones and a slowing pace from the prior
month.

As both CPI and PPI soften, markets have started to moderate their
expectations for Fed rate hikes. Still, the positive data doesn’t mean
it is “mission complete” for the Fed, said Ben Emons, managing
director of global macro strategy at Medley Global Advisors.

“If you strip off any of the headline noise, some of the… CPI, even
PPI [numbers] show still upward pressures,” he told CNBC’s “Squawk Box
Asia” on Friday. “The Fed cannot be done here. It probably means that
the 75-basis-point rate hike remains on the table.”

“The pricing on the Fed fund futures and euro-dollar futures shows
that we’re still more towards the 75-basis-point rate hike. And I
think it is because of the guidance that all these Fed speakers keep
giving us — ‘just don’t be complacent here, we’re going to continue,’”
Emons added.

Last week, St. Louis Federal Reserve President James Bullard said the
central bank will continue raising rates until it sees compelling
evidence that inflation is falling.

That message is consistent with other Fed speakers, including regional
presidents Loretta Mester of Cleveland, Charles Evans of Chicago, and
Mary Daly of San Francisco. All of them have indicated recently that
the inflation fight is far from over and more monetary policy
tightening will be needed.

‘Not enough evidence

The Fed raised its benchmark rate by 0.75 percentage points in both
June and July — the largest back-to-back increases since the central
bank started using the fund’s rate as its chief monetary policy tool
in the early 1990s.

Victoria Fernandez, the chief market strategist at Crossmark Global
Investments, said the Fed is nowhere near putting the brakes and
turning dovish on rate hikes, given the current data.

“For me, there’s not enough evidence for the Fed to make a huge pivot
from where they are. I still think they’re considering 50, 75 basis
points at the September meeting,” she told CNBC’s “Street Signs Asia”
on Friday.

“Not anything coming out of the economic reports from CPI or the PPI
in today’s session is going to change that at this point in time. I
think we still have a considerable ways to go,” she added.

Investors will be looking for guidance from Fed Chair Jerome Powell on
what the Fed could do at its next meeting in September.

Inflation still sticky

Fernandez underlined the stickier parts of inflation, such as wage and
rent pressures, are still high. Those are not coming down at the same
rate as energy, oil, and gasoline components, she said.

The inflation data in the next CPI report in September will be key for
markets, she added.

“If those show us that we actually have a plateau or starting a
downward trend, then I think the Fed maybe comes back a little bit to
50 basis points,” she said. “If it doesn’t show that, or if it even
goes a little bit higher based on some stickier components, then I
think you’re right back at 75 for the meeting,” said Fernandez.

The Federal Open Market Committee does not meet in August, when it
will hold its annual symposium in Jackson Hole, Wyoming.

Powell could use that opportunity to update markets on the path ahead
for monetary tightening, noted Medley Global Advisors’ Emons, adding
the Fed understands price pressures are so “tenacious and sticky that
it can’t really back away.”

“You shouldn’t underestimate Jackson Hole. Some people dismiss it —
that it isn’t the platform. But he could well take the stage and
should at least re-emphasize that the Fed’s really on this mission to
bring inflation really down. That’s the key objective.”

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