The three senior officials of the Federal Reserve "let the eagles together": Inflation has not yet been controlled, and interest rates need to continue to be raised this year

Author: Ge Jiaming

The shocking non-agricultural data did not quell investors’ fear of raising interest rates. The higher-than-expected wage increase made investors price the Fed’s rate hike in July as a sure thing. Several Fed officials spoke out one after another, raising interest rate expectations further.

On Monday, July 10, local time, several Fed officials spoke one after another that continuing to raise interest rates is the mainstream. They reiterated that interest rates must be raised to bring inflation down to 2%, but also hinted that interest rates are close to their peak.

Federal Reserve Vice Chairman Michael Barr said that the Fed’s monetary policy has made great progress in the past year and is very close to the goal, but there is still some work to be done.

Mary Daly, president of the San Francisco Fed, believes that the current US inflation rate is still too high and needs to continue to raise interest rates twice:

Looks like two more rate hikes are needed to tame inflation. The Fed should base its policy decisions on economic data. The bigger risk for the Fed right now is not raising rates too much than raising them too much, although the gap between the two is rapidly narrowing.

Daly said signs of a slowdown are already starting to be seen, and supply and demand are getting better balanced.

Cleveland Fed President Loretta Mester said at a UC San Diego event on Monday that to ensure inflation returns to 2%, rates need to rise further, and for some time:

The US economy is more resilient than expected earlier this year, inflation remains stubbornly high and core inflation remains stubborn. To ensure that inflation returns to 2% in a sustained and timely manner, my view is that interest rates need to rise further from current levels and then remain there for some time.

But Atlanta Fed President Raphael Bostic disagreed, saying the Fed could be patient as the U.S. economy showed signs of slowing.

Speaking in Atlanta on Monday, Bostic said that the Fed can be patient and interest rates are clearly at a restrictive level:

We continue to see signs of a slowdown in the economy, which tells me that restrictions are working. The US economy is performing “incredibly” resiliently, but inflation remains too high. The Fed firmly believes that it can contain inflation and ensure that the inflation rate can fall back to the target level of 2%.

U.S. inflation hit a two-year low in May, heralding the end of the inflation cycle, but core inflation remained stubborn. The market is closely watching the U.S. CPI for June, which will be released on Wednesday. It is expected that core inflation will still increase by 5% year-on-year, which will still far exceed the Fed’s 2% target.

The Fed will raise interest rates twice this year?

The Fed stopped for the first time at its June rate meeting since it started raising interest rates to fight inflation 15 months ago. The market generally expects the Federal Reserve to resume raising interest rates at the July 25-26 meeting on interest rates.

Fund markets are now pricing in a 94 percent chance of a rate hike in July, compared with 93 percent on Friday, according to CME Group’s FedWatch tool.

The July 7 non-farm payrolls report showed strong wage growth despite a slowdown in job growth last month, suggesting the labor market remains strong enough for the Fed to raise interest rates:

The unemployment rate fell 0.1 percentage points from the previous month to 3.6%, in line with expectations and hovering at a multi-decade low, suggesting that labor supply is still tight; average hourly wages continued similar gains in April and May, with a year-on-year increase of 4.4% over expectations , the small increase in the average weekly hours represents a rise in overall wages for workers, suggesting the labor market remains strong enough to push up inflationary pressures enough for the Federal Reserve to raise interest rates.

Economists generally believe that U.S. non-farm hourly wage growth must slow to an annual rate of about 3.5% year-on-year,** to meet the Fed’s goal of bringing inflation back to 2%. But wages have grown faster than prices, and the risk of a “wage-inflation spiral” is intensifying as more workers demand big wage hikes from companies.

The odds of betting on an additional rate hike after July and before the end of the year hover around 30%.