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Will Low Inflation Delay Fed Rate Hikes?

James Picerno profile picture
James Picerno

Fed funds futures are currently pricing in a low probability that the Federal Reserve will squeeze monetary policy at any one of the next three FOMC meeting (July 26, September 20, November 1). The September meeting has recently been identified by some analysts as the most likely date for another rate hike. But the futures market estimates the probability at just 13% that the central bank will lift its target rate (currently at a 1.0-1.25% range) on September 20 (based on early trading on July 12).

Meantime, Fed policymakers have turned cautious on additional rate hikes. Fed Governor Lael Brainard on Tuesday said that her voting for tighter policy depends on the incoming inflation data. "I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target," she said via Reuters.

Minneapolis Federal Reserve Bank President Neel Kashkari also voiced concern this week about muted inflation data. Citing low wage growth, he said that "it can't be that bad to find workers because if you really were having to compete with other companies to find the scarce talent, we would see wages climbing, and we are not seeing wages climbing very quickly."

Indeed, the annual pace of average hourly earnings for private-sector employees has weakened lately, rising 2.5% in June - close to the softest gain in more than a year.

Broader measures of inflation have also weakened lately. Core personal consumer expenditures (excluding food and energy), the Fed's preferred inflation metric, has been edging down in recent months, falling to a 1.4% year-over-year pace in May - the lowest since December 2015 and well below the Fed's 2.0% inflation target.

The Treasury market, however, reflects more confidence that the Fed's rate

This article was written by

James Picerno profile picture
James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers. Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg Markets, Mutual Funds, Modern Maturity, Investment Advisor, Reuters, and his popular finance blog, The CapitalSpectator. Visit: The Capital Spectator (www.capitalspectator.com)

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