For 16 months, the U.S. Federal Reserve has been long on inflation anxiety and short on interest rate surprises.
On Tuesday, the central bank’s Federal Open Market Committee (FOMC), which sets monetary policy, will begin deliberations that will likely continue this trend the following day with a 25 basis point rate hike and lots of teeth-gnashing about the continued threat of inflation.
The CME Rate Watch tool is currently forecasting a 98% probability of another quarter point increase that would raise the federal funds rate to a range of 525 to 550 basis points – its highest level in roughly 17 years. The FOMC suspended its 15-month diet of monetary tightening last month, briefly raising investor hopes that it had turned dovish for the foreseeable future. But in a statement following its decision, the bank suggested that inflation remained concerning and that further rate hiking was possible.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” FOMC said. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations as well as financial and international developments.
Crypto markets have been curiously resistant to the latest macroeconomic utterances. With a few blips, bitcoin has been trading in a range between $29,000 and $31,500 for much of the past two months. It was recently changing hands at $29,100, down more than 3% over the past 24 hours. "It will take a fresh catalyst to excite bitcoin traders," Edward Moya, senior market analyst at foreign exchange market maker Oanda, wrote in a Monday note.
On Tuesday, the Conference Board will release its latest Consumer Confidence Index (CCI), which reflects sentiment about the economy. Thursday reports on jobless claims will offer the latest data on economic growth, while Friday’s Personal Consumption Expenditures (PCE), a favored inflation measure of the Federal Reserve, could buttress the bank’s latest move – or not.
The Federal Reserve will take its latest steps in trying to reduce inflation to its long-sought goal of 2%. The June 3% reading continued an encouraging trend, slightly beating expectations and dropping from 4% in May. Just a year ago, inflation was roaring at 9%. Still, the Fed has remained fretful about a still sizzling job market that typically dovetails with rising prices and a stubbornly high core PCE. In remarks to the House Financial Services Committee a week after the Fed halted rate hikes, Fed Chair Jerome Powell noted that “nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”
Consumer Confidence Index
Last month, the CCI soared to 109, up seven points from May and its highest level since January 2022 as consumers exulted over the vibrant jobs market and a lower likelihood of recession. The current consensus is for the CCI to rise to 112. One potentially bitter note: The Conference Board survey also found that consumers haven’t entirely ruled out the possibility of recession.
Last week’s jobless claims turned for the worse last week, at least for analysts and investors hoping for signs the job market would cool. The 228,000 first-time jobless claims for the week ending July 15 were about 9,000 fewer than the previous week and lower than expectations. The forecast is for first-time claims for the week ending July 22 will rise to 235,000, a small number that is unlikely to unsettle asset markets.
May durable goods orders rose 1.7%, their third consecutive, monthly gain, offering another sign that the U.S. economy was doing anything but shrinking. Expectations are for a 1.5% rise when the Census Bureau publishes June data.
Personal Consumption Expenditures
PCE has declined steadily over the past year, another upbeat signal for inflation watchers. May’s 3.8 reading, year-over-year, was down from over 5% at the start of the year. Core PCE, which strips away more volatile food and energy costs, has seesawed between 4.6% and 4.7% the past three months, a less optimistic trend that has concerned the Fed, although expectations are for a 4.2% reading in June.
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