Fed’s tightening cycle may end soon due to inflation news.
The Federal Reserve’s Tightening Cycle May Be Coming to an End
The Federal Reserve’s aggressive rate revisions over the past year may be nearing their conclusion as signs of decreasing inflation emerge. Recent data on wholesale and consumer prices indicate that inflation is on the decline, which is good news for an economy that has been grappling with rising price pressures for the past two years.
Both the producer price index and the consumer price index came in lower than expected, suggesting that the fight against inflation is progressing better than anticipated. This positive development increases the likelihood that the Fed will only raise rates one more time this year, marking the end of its historic quest to combat the country’s worst inflation in nearly two generations.
Pausing to Assess the Impact
In June, the Fed paused its rate hikes for the first time, signaling a temporary break to evaluate the effects of the yearlong barrage of rate increases on the economy. However, at the same meeting, Fed officials surprised economists by indicating that there would be two more rate hikes later in the year. The latest inflation readings, however, have shifted expectations, with many now believing that the July rate hike will signal the end of the tightening cycle.
The current rate target is 5% to 5.25%, and investors anticipate that this year’s terminal rate will range from 5.25% to 5.50%. While some members of the Federal Open Market Committee (FOMC) may advocate for an “insurance” hike in September due to high core inflation, the prevailing market indicators suggest that the Fed is moving closer to the end game.
Investor Sentiment and Future Outlook
Investors overwhelmingly believe that the expected rate revision in July will be the last for Fed Chairman Jerome Powell and the FOMC. The probability of another rate hike in September has decreased significantly, with investors now assigning just a 13% chance. However, Fed officials will remain open-minded and base their policy decisions on future economic developments and reports.
The rate hikes have had a significant impact on various aspects of the economy, including credit cards, mortgages, investments, and savings. Mortgage rates have risen, making homes less affordable, while credit card APRs have soared. As the Fed’s target interest rate increases, borrowing and repaying money becomes more costly.
Looking ahead, key economic reports, including inflation data for July and August, will provide further insight into whether a pause in rate hikes is warranted. The Fed’s monetary policy will be guided by the data and the state of the U.S. economy, which is currently showing signs of slowing.
Overall, the decreasing inflation and indications of a slowdown in core inflation suggest that the expected rate hike at the end of this month will likely be the last of the cycle. While unforeseen shocks could still impact prices, the current state of the economy and its productive capacity make this less of a risk than before.
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