' A Long Way to Go' to Tame Inflation May Be a Shorter Road Than Hawks Assume
The Federal Reserve halted the increase of interest rates during their recent policy gathering, however, the Chairperson of the Federal Reserve, Jerome, conveyed to the House Financial Services Committee on Wednesday that further increments were probable.
"Inflation has slightly eased since the midpoint of previous year," he stated, but "inflationary forces persist at a considerable level, and the journey towards attaining a 2% inflation rate is still extensive." He further remarked that "almost all FOMC members anticipate a need to incrementally increase interest rates by the conclusion of this year."
In the meantime, predictions for funds futures are still leaning towards a situation where there will be only one increase in interest rates. This is based on the most likely estimates for the next three Federal Reserve meetings. Following a 25-basis-points hike at the meeting in July, it is widely assumed that the Fed funds target rate will reach its peak at a range of 5.25% to 5.50%.
Predictions for Federal Reserve Interest Rates in the Future
A basic framework utilizing the rates of unemployment and consumer prices in order to analyze the Federal Reserve's policy indicates a somewhat restrictive approach being followed. This assumption seems reasonable, but lacks concrete evidence, implying that the likelihood of rate increases coming to a halt in the near future is uncertain.
Federal funds rate versus joblessness rate and consumer price index
The return on investment from the Treasury is also calculated based on the assumption that the Federal Reserve's target interest rate has reached its highest point or is about to reach it. The 2-year yield, which is affected by monetary policy decisions, remained steady at 4.68% on June 21st.
Despite the significant increase of 90 basis points in this important Treasury yield in the last month, its current level still falls below the rate set by the Federal Reserve. This indicates that the market believes that the Federal Reserve is nearing the end of its cycle of interest rate hikes.
Comparison of US 2-Year Treasury Yield and Federal Funds Rate The U.S. 2-year Treasury yield and the federal funds rate are being analyzed to identify any potential correlations or disparities.
The ultimate decider on the future course of action will likely be the upcoming data. Worries have emerged that although inflation has reached its highest point, the decline in pricing pressures has been sluggish and not as consistent as desired by the Federal Reserve.
The positive information is that the negative inclination seems likely to continue according to the average alteration in the one-year speed of seven gauges of inflation (to view the list, please refer to page three on this page).
Inflation Measures for American Consumers
The forecasting model used by CapitalSpectator.com also suggests that there will be less pressure on prices in the coming months. However, this decrease in pressure will occur gradually, indicating that there may be more than just a rate hike happening, and it might even be probable.
Changes in the Core Consumer Price Index (CPI) percentage
The ultimate proof of this will be the real information available. Another crucial way to confirm this is by looking at the upcoming June CPI report, which will be released in a few weeks. Currently, there is a prevailing sense of cautious optimism suggesting that the future may not be as long as predicted by the individuals who are more inclined towards conservativsm.
However, if the doves are being premature once again, it is probable that the cause for disappointment will originate from a sturdy economy, as Tim Duy, the primary US economist at SGH Macro Advisors, suggests. In a recent communication to clients following the Federal Reserve's decision to halt, Duy clarified the potential source of letdown.
The ongoing process of increasing interest rates continues. We should not ignore the latest statement from the Federal Open Market Committee (FOMC) and its forecast of an additional 0.50% increase in rates. The economy has not weakened as predicted. As we have mentioned before, economic activity is more robust than what economists usually anticipate. It is designed to promote growth from within and is currently being aided by fiscal policies and demographic factors. The longer this positive trend persists, the more market participants and the Federal Reserve will believe that the neutral interest rate has gone up.
To recall and modify a well-known statement from the time when Bill Clinton was president,
"It continues to be the economy, you fool."
Consequently, the pivotal inquiry arises: Can the economy maintain its resilience?
