A measure of U.S. core inflation hit a 30-year high in January, leaving unchanged the outlook for a Federal Reserve rate hike in March

2022-08-03 0 By

Since the beginning of this year, the us inflation situation, labor market, geopolitics and other internal and external environments have been constantly fluctuating, bringing more uncertainties to the outlook of the Federal Reserve’s monetary policy.With the March FOMC meeting just around the corner, there are differing views on how the Fed will weigh the many influences.Meanwhile, the U.S. Commerce Department on Feb. 25 released a key inflation gauge watched by Federal Reserve policymakers.Data showed that THE US PCE price index rose 6.1% year on year in January, the biggest one-month increase since 1982.The core PCE price index rose 5.2 percent in January from a year earlier, the highest level since 1983.Given the latest developments, economists and analysts generally expect the outlook for a March fed rate hike to remain unchanged.In an interview with 21st Century Business Report, Yi Huan, chief macroeconomist at Huatai Securities, said the Fed’s margin of error on inflation had narrowed sharply, putting pressure on the fed to tighten in the short term.Therefore, it cannot be ruled out that the Fed’s monetary tightening cycle is more “front-loaded” than previously and may be more “hawkish” than market expectations in the near term.The US Consumer price Index (PCE) rose 6.1% year on year in January, beating expectations of 6.0% and 5.8%, according to data released by the US Commerce Department on Thursday.The core PCE price index, which excludes food and energy prices, rose 5.2 percent in January from a year earlier, the highest level in nearly 30 years and well above the Fed’s 2.0 percent longer-term inflation target.The latest inflation figures show that us inflation still does not appear to be coming down from its high levels.On the same day, a separate report showed that The American public was feeling the pinch from the “high fever” of inflation.The final Michigan consumer sentiment index edged up to 62.8 in February, slightly above expectations of 61.7 but still hovering near a 10-year low.”The main reasons for the weakness in consumer confidence are the negative impact of inflation on personal finances, declining confidence in government economic policies and low expectations for the economy’s long-term prospects,” Richard Curtin, director of the Michigan Consumer Confidence Survey Board, said in a statement.In a breakdown of January’s PCE data, the analysis showed that sectors previously heavily affected by the pandemic, such as restaurants, hotels and transportation, and supply bottlenecks, will contribute significantly less to U.S. inflation as the global economy picks up speed.More “sticky” price indicators, such as rents and wages, are likely to be a slower contributor to inflation.”Taken together, we expect us core PCE to peak in February, march and year-end at around 2.5 per cent, still above the Fed’s 2 per cent inflation target.”Hazard said.Huan also stressed that while core inflation may be near its peak, the Fed is likely to remain “hawkish” and tight neutral in the near term as it has lost some credibility in its delayed response to inflation last year.She argued that the Fed was technically still expanding its balance sheet at a time of high inflation and was clearly “out of time”.”The Federal Reserve is now in ‘better late than never’ mode. It has to stop QE (quantitative easing) and start raising rates as soon as possible to restore its credibility,” Yi said.She sees room to ease the Fed’s policy stance at least several months after inflation is firmly on the decline.According to previously released minutes of the Fed’s January FOMC meeting, officials agreed that inflation risks were on the upside and that a faster pace of policy tightening was warranted if inflation remained elevated.This week, a number of Fed officials again struck a similar tone in their statements about the need for action to tackle the worst US inflation in 40 years, despite the uncertainty about the global economic outlook posed by geopolitical risks.”Barring an unexpected turn in the economy, it would be appropriate to raise the federal funds rate in March and raise it further in coming months,” Cleveland Fed President Loretta Mester said on Wednesday.She noted that while geopolitical events in Ukraine pose some downside risks to near-term growth forecasts, they also increase upside risks to inflation forecasts.Atlanta Fed President Robert Bostick agreed that the Fed’s top priority is controlling inflation.He said he would support at least four quarter-point rate rises this year.San Francisco Fed President Richard Daley has also changed his dovish tone in several comments this week.She said the Fed needed to tighten monetary policy given high inflation and a strong US economy.In his latest speech, Hawkish Fed governor Robert Waller even said a 50 basis point hike in March was a strong possibility if the data were strong, leaning toward a 100 basis point hike by mid-year.He called excessive inflation “worrisome” and said the Fed needed to “act quickly”.Waller also said the Fed must act decisively to maintain public confidence that it can control inflation.In addition, Federal Reserve Chairman Jerome Powell will appear on March 2-3, EASTERN time.In his pre-prepared remarks to the hearing, Mr Powell also reiterated that it would be appropriate to raise rates soon.That leaves a March rate hike all but assured, with the question of whether it will be 25 basis points or 50 basis points.Jan Hatzius, chief economist at Goldman Sachs, said geopolitical risks would not prevent the Fed from raising rates at its upcoming meeting, but “reduces the probability of a 50 basis point hike in March”.According to the CME FedWatch tool, markets are now pricing in a 76% probability of a 25 basis point hike in March and a 24% probability of a 50 basis point hike.Since the beginning of this year, as inflation has continued to climb, market expectations for the number of rate hikes by the Fed have also increased, from 3-4 late last year to around seven.But the odds of a hike at the Fed’s first half of the year look high, and the lack of a hike at every fed meeting in the second half, as the market had been expecting.She noted that “feedback” mechanisms in the economy and markets could “force back” expectations of 2-3 rate increases.Notably, some analysis suggests that the current high inflation will reduce the scope for the Fed to turn dovish in the second half of the year, leaving the Fed likely to remain hawkish throughout the year.But The second half of the year will likely be weaker than the first, Mr Huan said.”On the one hand, Fed tapering will lower us growth and inflation expectations,” she explained.On the other hand, tightening in the rest of the world, and even deflation in tradables and asset prices, will likely cool us inflation and growth after the second quarter, accelerating the downward trend in inflation expectations.”The latest analysis suggests that the improved U.S. labor force participation rate, due to the end of government subsidies, could gradually ease upward pressure on wages, helping to avoid a wage and price spiral that would push inflation higher.On the other hand, with the apparent easing of the epidemic, the us economic recovery will accelerate in the short term, and “the Federal Reserve is expected to have a high probability of controlling inflation”.But Huan stressed that the Fed has made a leap from quantitative to qualitative changes in monetary policy from internal, external, political, economic and public pressures, and that fighting inflation is the fed’s biggest goal.This year, the Fed is expected to tighten monetary policy at a faster and “front-loaded” pace, meaning it may be more “hawkish” than the market expects in the near term.For more information, please download the 21 Finance APP