US stock market investors will be closely keeping track of the latest developments in the economy. From jobs data, housing starts to the most important of all parameters – inflation, the upcoming numbers will hold importance for the investors at large. Fed’s next Federal Open Market Committee (FOMC) meeting is scheduled for September 20-21 which will not only let us know how much of rate hikes happens but also the pace of rate hikes possible in the future.
US CPI index increased by 8.3% in August. US inflation increased from 8.6% in May to 9.1% in June before dropping to 8.5% in July, indicating that it is still persistent and refusing to go down easily. The latest market decline may be a reflection of the growing chatter about 100 bps as opposed to 75 bps. At the September 2022 FOMC meeting, a 75 bps rate hike is expected to be delivered by the Fed.
Ethan Harris, Head of Global Economics, BofA Global Research in a recent note shares his view – The moderation in July CPI services does not signal “all clear” for the Fed. While some retracement in goods prices and a moderation in energy prices help the Fed’s outlook for lower inflation, these features are likely already part of the Fed’s baseline outlook. According to the Fed, restoring price stability will also involve curtailing service inflation and reversing supply and demand imbalances in the labor market.
The better-than-expected CPI report in July does not alter their view that further rate hikes are forthcoming. Nonetheless, the favorable tone of the July inflation data means the Fed is likely to raise its policy rate by 50bp in September, as opposed to opting for another large 75bp hike. BofA continues to forecast 50bp hikes in September and November, followed by a 25bp hike in December, bringing the target range for the federal funds rate to 3.50-3.75% at year-end.