- Federal Reserve looks for more "good inflation" data before cutting rates.
- Jerome Powell reiterates data-dependent approach, says they will make decisions meeting by meeting.
- Federal Reserve policymakers are divided over the timing of the policy pivot.
Federal Reserve (Fed) left the policy rate unchanged at 5.25%-5.5% following the June policy meeting, as expected. The revised Summary of Economic Projections (SEP), the so-called dot plot, showed that policymakers were divided over the near-term rate outlook. Four of 19 officials saw no rate cuts in 2024, seven projected a 25 basis points (bps) rate reduction, while eight marked down a 50 bps cut in the policy rate.
President of the Philidelphia Fed Patrick Harker leaned into a cautious stance on Monday, noting that the Fed may need to keep rates where they are for longer than markets currently hope.
Key Harker comments
Monetary policy remains positioned in restrictive territory.
Keeping rates where they are for a bit longer will help get inflation down and mitigate upside risks.
More data is essential to come to a decision on rate cuts given choppiness so far this year.
If my economy forecast plays out, I think one rate cut would be appropriate by the year's end.
I still forecast slowing, but above-trend growth, a modest rise in the unemployment rate, and a long glide back to 2% inflation.
Last week's CPI data was very welcome, but overall progress on inflation in recent months has been modest.
The long-term stubborness of shelter inflation remains a concern, as does service sector inflation.
Latest inflation data is quite promising, but falls short of confidence needed, has not quite dissipated uncertainty.
It is fine to keep rates where they now and wait for more data.
We are not even close to material deterioration in the job market.
Globally rates are heading down, just at a different pace.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Fed commentary will be key
Fed Chairman Jerome Powell refrained from hinting at the timing of the rate reduction in the post-meeting press conference. "We need further confidence, more good inflation readings but won't be specific about how many to start rate cuts," Powell explained.
Following the Fed event and May inflation data, the probability of the Fed leaving the policy rate unchanged in September declined toward 30% from 50%, according to the CME FedWatch Tool.
With the Fed's blackout period coming to an end after the June meeting, investors will pay close attention to comments from policymakers in the near term.
Cleveland Fed President Loretta Mester said that she would like to see a "longer run of good-looking inflation data," and Minneapolis Fed President Neel Kashkari stated over the weekend that it would be a “reasonable prediction” that the Fed will wait until December to cut interest rates, adding that the central bank is in a very good position to get more data before making any decisions.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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