There's an entire industry dedicated to reading the minds of Federal Reserve Chairman Jerome Powell and other members of the Fed's Open Market Committee to understand what they plan to do with interest rates.
On Tuesday, the industry heard Powell tell lawmakers on Capitol Hill that he wanted “better data” to be confident that a recent easing in inflation readings means prices are finally under control.
Well, Chairman Powell and his colleagues had new data from the Commerce Department on Thursday morning, the Consumer Price Index for June, and the news was surprisingly good.
Year-on-year inflation fell for the third straight month, with prices up 3% since June last year but down from more than 9% just two years ago.
So the question is, what will the Fed do with this good data? While economists are pleased with today's inflation news, Paul Ashworth, chief North American economist at Capital Economics, said it's hard to say whether the data is good enough for consumers to see interest rate cuts anytime soon.
“This is certainly good data to have,” Ashworth said. “The Fed is obviously a little vague about what exactly it wants.”
Ashworth added that people do have some clues: Annual inflation has been inching closer to the Fed's 2% target in recent months. And then there's the labor market, which Stephen Friedman, senior macroeconomist at Mackay Shields, said is finally starting to ease up a bit.
“I would describe this as strong but not tight, it's a nuance,” he said, “but it does mean that the labor market is no longer a significant source of inflationary pressure.”
And looking at the economy as a whole, there are signs that the economy is cooling, said Lauren Seidell Baker of ITR Economics.
“GDP today is at its highest level ever,” Seidel Baker said, “so it's important to note that our economy is still growing, but the pace of growth has certainly slowed.”
So what should the Fed be looking at going forward? Ken Kuttner, an economics professor at Williams College, said the Fed was surprised when inflation spiked a few years ago and delayed raising interest rates.
“Simply put, you can never have enough data,” Kuttner said. “I can safely say they were nearly a year out of date.”
That experience could lead the Fed to be cautious about cutting rates until it is more confident that inflation is under control, which Kuttner said could come in handy when there is “good data” in the next few months before the Fed's September meeting.
“If the data we see up until then confirms the historical trends of slowing growth and subdued inflation, a September rate cut could well be on the table,” Kuttner said.
Kuttner said the odds are about 50-50.
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