After two consecutive rate hikes of 75 basis points, will the Fed turn relatively dovish in September or remain hawkish?
Many investors in the market believe that as the U.S. economy falls into a technical recession and the labor market weakens, the Federal Reserve may have to slow down the aggressive rate hike process and turn dovish.
But recent statements by senior Fed officials seem to suggest that the Fed will continue to maintain its hawkish stance.
On Wednesday, August 3, San Francisco Fed President Mary Daly, who is known for its dovishness in the Fed, said that if the U.S. economy develops as expected, the Fed will raise interest rates by 50 basis points next month. Those who have made up their minds to curb high inflation:
From the data I’m seeing now, I think a 50 basis point hike in September is appropriate.
However, if we continue to see inflation climbing recklessly and the labor market still showing no signs of slowing, our stance may change and perhaps another 75bps rate hike would be more appropriate.
However, based on current data, I think the next rate hike of 50 basis points is appropriate.
Daly believes that the market has reacted to the Fed’s tightening of monetary policy, but it remains to be seen other evidence of the Fed’s actions affecting the economy:
We have a lot of measures that are tightening, but we haven’t seen the slowdown fully manifest.
Daly also said raising the Fed’s policy rate to 3.4% by the end of the year “is a reasonable target.” This means that the Fed will also raise interest rates by about 100 basis points during the year.
Following Daly’s speech, investors in futures contracts tied to the Fed’s benchmark overnight rate reduced the likelihood that the Fed will raise the policy rate by 75 basis points at its September meeting.
According to statistics from CME Group, the market expects that the possibility of the Fed raising interest rates by 50 basis points in September is close to 60%, while earlier on Wednesday, the market predicted that the probability of raising interest rates by 50 basis points and 75 basis points was basically the same.
On the same day, Richmond Fed President Thomas Barkin stated that the Fed is committed to controlling the worst inflation in four decades and intends to bring inflation back to the Fed’s 2% target:
We are committed to returning inflation to our 2% target and have made it clear that we will do everything in our power to achieve it.
He thinks inflation will subside, but “not immediately or suddenly, nor can it be predicted.” He said three drivers should help lower inflation: flattening demand, thanks in part to the Federal Reserve raising interest rates; improving global supply chains and easing pressure on commodity prices. But even the Fed has no way of doing anything about the other two factors:
The Fed also has the tools, and we have the credibility among households, businesses and markets that we need to achieve this outcome over time, and we will succeed.
When talking about the market’s concerns about a U.S. recession, Barkin believes that the current nearly 400,000 new jobs per month and the lowest unemployment rate in nearly half a century are “a bit inconsistent” with the assertion that the U.S. economy has fallen into recession.
Earlier on Wednesday, St. Louis Fed President James Bullard, a big Fed hawk, continued to endorse the Fed’s aggressive rate hikes.
Bullard favors a strategy of “early” a big rate hike, which he wants to end the year at 3.75% to 4%.
On Wednesday, August 3, Bullard said:
We would have to see convincing evidence that headline and other measures of core inflation have fallen convincingly across the board to consider our actions sufficient.
We still have some ways to implement further tightening of monetary policy, and we should have a policy rate of 3.75% to 4% this year. We track the data very carefully.
According to Bullard, the Fed will also raise interest rates by 150 basis points during the year.
Federal Reserve Chairman Jerome Powell said last week that the central bank may consider another “unusually large” rate hike at its September meeting, with officials making decisions based on more than a dozen key data points, including inflation, employment, between now and Consumer spending and economic growth at that time.