Will Low Inflation Delay Fed Rate Hikes?

Fed funds futures are currently pricing in a low probability that the Federal Reserve will squeeze monetary policy at any one of the next three FOMC meetings (Jul. 26, Sep. 20, Nov. 1). The Sep. meeting has recently been identified by some analysts as the most likely date for another rate hike. But the futures market estimates the probability at just 13% that the central bank will lift its target rate (currently at a 1.0%-to-1.25% range) on Sep. 20 (based on early trading on Jul. 12).

Meantime, Fed policymakers have turned cautious on additional rate hikes. Fed Governor Lael Brainard on Tuesday said that her voting for tighter policy depends on the incoming inflation data. “I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target,” she said via Reuters.

Minneapolis Federal Reserve Bank President Neel Kashkari also voiced concern this week about muted inflation data. Citing low wage growth, he said that “it can’t be that bad to find workers because if you really were having to compete with other companies to find the scarce talent, we would see wages climbing, and we are not seeing wages climbing very quickly.”

Indeed, the annual pace of average hourly earnings for private-sector employees has weakened lately, rising 2.5% in June – close to the softest gain in more than a year.

Broader measures of inflation have also weakened lately. Core personal consumer expenditures (excluding food and energy), the Fed’s preferred inflation metric, has been edging down in recent months, falling to a 1.4% year-over-year pace in May – the lowest since Dec. 2015 and well below the Fed’s 2.0% inflation target.

The Treasury market, however, reflects more confidence that the Fed’s rate-hike regimen will roll on. The policy sensitive 2-year yield in particular remains in an uptrend. Although the 2-year rate slipped under 1.40% yesterday (Jul. 11) for the first time this month (black line in chart below), the technical profile for this maturity still implies that rates will rise in the near term.

1 2
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Ed Dolan 2 weeks ago Contributor's comment

Agree. I think it is also worth looking at the Cleveland Fed's unique estimates of #inflation expectations. I like them because they try to break out the risk premium factor in the TIPS spreads data to get a cleaner read on pure expectations. Look at their charts ( www.clevelandfed.org/.../...tion-expectations.aspx ) and notice how the yield curve on inflation expectations is flattening. IMO that may be the strongest point in support of the view that the case for rapid rate hikes is weakening.

Carol Klein 2 weeks ago Member's comment

Thanks, Ed.