Fed open to another rate hike after expected increase in July

BLOOMBERG 

Federal Reserve policymakers are primed to resume raising interest rates this month and remain open to a further increase later in the year.
While officials were encouraged by a step-down in price pressures last month, they’re not inclined to pronounce an end to their battle to rein in inflation that has repeatedly surprised them with its persistence. Contributing to their caution: A keen desire to avoid repeating the mistake of the 1970s, when the Fed prematurely let up on its efforts to contain inflation, only to see price increases reaccelerate to double-digit levels later.
“It’s really too early to say that we’ve declared victory on inflation,” Federal Reserve Bank of San Francisco President Mary Daly told CNBC.
Investors have increased bets that the widely anticipated quarter-percentage-point increase at the Fed’s July 25-26 meeting will be the central bank’s last in this credit tightening cycle.
Stock and bond prices bounded higher on those expectations this past week, with the yield on the Treasury’s two-year note — a market barometer of the Fed’s intentions — falling to 4.76% from 4.95% on July 7.
Driving the rally: A big drop in inflation last month. Consumer prices rose 3% in June from a year earlier, compared with 4% in May, the Labor Department reported on July 12. That was the smallest increase in more than 24 months and well below the 9.1% surge seen just a year ago.
That in turn fuelled hopes that the central bank can pull off a fabled “soft landing” of the economy — bringing inflation down without crashing the US into recession.
“You cannot get in the way right now of the soft-landing narrative — that narrative is building momentum,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said.
Fed officials, for their part, are cautious about reading too much into any one month’s data, no matter how reassuring it is. That’s especially the case given that they’ve been fooled before by let-ups in price pressures only to see them subsequently pick up.
“This is welcome news, but one data point does not make a trend,” Fed Governor Christopher Waller said.
“Inflation briefly slowed in the summer of 2021 before getting much worse, so I am going to need to see this improvement sustained before I am confident that inflation has decelerated.”