New data gives Fed leeway on rates at July meeting

At the same time, retail sales rose unexpectedly, suggesting that demand is holding up even as the Fed tries to contain it with higher interest rates. This could warrant a full point rate increase. “Today’s strong report keeps the Fed in aggressive policy tightening mode,” Kathy Bostjancic, chief U.S. economist at Oxford Economics, wrote after the release.

These two new readings on the economy follow a higher-than-expected June consumer price index reading, which pushed inflation to a new four-decade high and showed signs that increases prices extend to rents and services that might take time to cool down.

Several Fed officials said following the report that they would still favor a three-quarter point hike at the July 26-27 central bank meeting, but would watch consumer spending. inflows and inflation forecasts to determine if a larger move was needed. Because the data showed that consumption remains solid but inflation expectations are becoming less of a concern, it should leave the central bank’s options open.

Still, both data points are revised, making it difficult to draw a definitive signal from either. The University of Michigan inflation expectations figure for July, which fell to 2.8% in the preliminary data from a previous reading of 3.1%, will be followed on July 29 by a final figure for the month that could be different.

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