Data-dependent Fed lacks data to change its mind


Federal Reserve policymakers like to claim they’re ‘data-driven’ when it comes to monetary policy decisions, but this month they’ve lacked consequential economic releases on the calendar to change their minds. . That should more or less seal the fate of interest rates for the rest of the summer, with less than two weeks until the Federal Open Market Committee meets again to discuss the federal funds rate.

When they meet July 26-27, FOMC voters are now expected to raise interest rates by 75 basis points to a range of 2.25% to 2.5%, matching last month’s huge hike. , the largest in nearly three decades. It will be remembered as a historically massive and appropriate step to rein in the worst inflation in four decades, but consumer prices are rising so rapidly in the United States that Wall Street had begun to wonder if enough was enough. Fortunately, it now looks like the Fed will stick to the original plan, and that’s a good thing. Too much improvisation will only give households and investors the impression that the central bank is getting desperate.

A consumer price report released on Wednesday showed inflation rose further, driven by general factors beyond high energy prices, many of which will not easily disappear without central bank intervention. . After that, traders began bracing for a potential 100 basis point hike that would have put the central bank in uncharted territory in the modern era of federal funds targeting, which began in 1994.

There are several reasons that probably won’t happen, barring an unforeseen shock. First, Fed speakers who have weighed in on the issue since the report have pointed to a 75 basis point hike. Among those who left the door open for a hike, Cleveland Fed Chair Loretta Mester and Federal Reserve Governor Christopher Waller cited exceptional data on retail sales and inflation expectations. as factors that could still change things. Both arrived on Friday morning in the form of an average, albeit better than expected, retail sales figure and a very encouraging survey of consumer inflation expectations. The Fed is likely to view the latter as more important; it showed median five- to 10-year inflation expectations fell to 2.8%, the lowest since July 2021.

Second, the Fed enters its traditional blackout period on Saturday, which prohibits public comment starting 10 days before a meeting. With market expectations now merging, the Fed ran out of time to communicate any change in its thinking. After breaking news data prompted the Fed to pivot during last month’s quiet period, central bankers won’t want to worry markets anymore. Central bankers don’t like to create unnecessary volatility, or so they say.

If there’s a wildcard, it’s housing data, which Waller also mentioned in his Thursday remarks. But the public is already getting a taste of it in the form of bad but not horrible transaction data from Zillow and other providers. Transaction volumes are declining, but home values ​​continue to rise amid supply shortages. What’s new will be Tuesday’s housing starts and building permits data, an important data set for a Fed that wants to cool demand without exacerbating the inventory problem. Still, it’s almost impossible to imagine a shock of that number forcing the Fed to change course.

Ultimately, this leads to the conclusion that the Fed will stick to 75 basis points, and that’s fine. Stunning the market now would give investors and consumers the impression that the Fed is way behind in the fight against inflation, muddied by incoming data and effectively improvising a solution to the worst inflation since 1981. Unfortunately, these things can in facts to be true: Led by Chairman Jerome Powell, the Fed has repeatedly issued an inflation apology throughout 2021, allowing price pressures to spread unabated. But unexpectedly, market-implied inflation expectations show that the Fed still has its credibility, and throwing away its playbook now would jeopardize this key asset in the fight against soaring prices.

More other writers at Bloomberg Opinion:

• Inflation is even worse if you measure it correctly: Justin Fox

• What it will take for the Fed to control inflation: Bill Dudley

• The labor market will help, not hinder, the fight against inflation: Conor Sen

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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