<\/p>\n
The cool news is that the latest data from the Federal Reserve\u2019s preferred inflation indicator came in lower than consensus in June, primarily due to a drop in energy prices.<\/p>\n
The not-so-cool news? During his second Fed Day as Chairman of the U.S. central bank, Kevin Warsh hemmed and hawed over whether the Personal Consumption Expenditure price index would continue to serve that role.<\/p>\n
And didn\u2019t offer a hint as to what the replacement might be.\u00a0<\/p>\n
As I reported, this lack of transparent strategy really ticked off Wall Street — more than the Federal Open Market Committee\u2019s decisive 9-3 vote to hold short-term benchmark interest rates steady July 29. Bonds sold off sharply with the 30-year Treasury hitting 5.22%.<\/p>\n
Within hours of Warsh\u2019s post-meeting press conference, J.P. Morgan abruptly shifted its forecast for the Fed\u2019s interest-rate outlook to a hawkish one.\u00a0<\/p>\n
The headline on the note?\u00a0 \u201cTalk is Cheap.\u201d <\/p>\n
J.P. Morgan Chief U.S. Economist Michael Feroli said the Fed would raise interest rates by 25 basis points in December instead of the second half of 2027.<\/p>\n
The note to clients expects the Fed to continue to hold the Federal Funds Rate at 3.75%-4.00% after the December hike but added that the risk of a September rate increase is real.<\/p>\n
Feroli\u2019s research update said that Warsh\u2019s ambiguous signaling raises concerns about the central bank\u2019s inflation strategy.<\/p>\n
\u201cIt\u2019s hard to know what to make of Warsh\u2019s remarks, which involved a lot of well-turned phrases but little in the way of a coherent macro view,\u201d Feroli wrote to clients, adding that the new Chairman \u201conce again failed to specify how he intended to achieve his stridently asserted inflation resolve,\u201d creating additional policy uncertainty for financial markets.<\/p>\n
Fed\u2019s mandate balances interest rates, jobs and prices<\/p>\n
The Fed\u2019s congressional dual mandate requires full employment and price stability.\u00a0<\/p>\n
The FOMC post-meeting statement was a terse five paragraphs that described the economic activity as \u201cexpanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.\u2019\u2019 It cited the energy shocks that have driven up prices in some sectors.<\/p>\n
Warsh has repeatedly vowed the Fed would bring inflation down to its 2% target — a measure it has missed for the last 63 months. He deflected questions from reporters on July 29 as to how this will be achieved with responses that included that there is \u201cno magic wand.\u201d <\/p>\n
(You can read the entire transcript of Warsh\u2019s press conference here and watch the video here.)\u00a0<\/p>\n
\u201cBut at what point is he actually going to act?,\u201d Yardeni Research President Ed Yardeni told CNBC July 30, adding \u201cWhat\u2019s it going to take?\u201d\u00a0\u00a0<\/p>\n
Here\u2019s the tricky part:<\/p>\n
Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.<\/p>\n
Fed holds interest rates steady thus far this year\u00a0<\/p>\n
The rate-setting FOMC voted unanimously in June to hold its benchmark Federal Funds Rate target in a range of 3.5% to 3.75%.\u00a0<\/p>\n
But the minutes of the June FOMC meeting showed policymakers splitting their views on inflation risk and the impact on interest rates with a rising hawkish tinge to the quarterly dot plot.<\/p>\n
The three Fed presidents who voted for a 25 basis-point hike in July — Cleveland\u2019s Beth Hammack, Minneapolis\u2019 Neel Kashkari and Lorie Logan of Dallas — expressed concerns about the impact of underlying inflation after the June meeting based in part on comments and observations from consumers and businesses in their regions.<\/p>\n
Warsh’s remarks cast doubt on the \u2060new chair’s credibility in delivering lower inflation, J.P. Morgan said in the July 29 note, adding that this could increase the urgency for the rest \u200bof the committee to act on its mandate for price stability.<\/p>\n
July FOMC resets traders\u2019 Fed interest-rate bets<\/p>\n
Traders are pricing \u2060in a 65.2% chance of a rate hike in September, down from 81% before the policy statement, according to \u200bthe CME Group FedWatch Tool.<\/p>\n
The futures markets are also pricing in an 82.7% cumulative probability that the funds rate will be higher than the current 3.50%-3.75% by the December FOMC meeting.<\/p>\n
Related: Fed interest-rate decision rocks Wall Street’s inflation fears<\/p>\n
BofA Global Research forecasts three rate hikes starting \u2060in \u200bSeptember.<\/p>\n
Long-standing Fed dove Citigroup maintained its \u200bforecast for rate cuts in October and December this year and one in January 2027 \u200bfollowing the July FOMC meeting.<\/p>\n
Key drivers behind the June PCE drop<\/p>\n
Questions whether the PCE price index will remain the primary reference tool for monetary policy with no answers as to what will replace it have further heightened market jitters.<\/p>\n
Headline PCE dropped0.1% month-over-month in June and fell from 4.1% to 3.7% year-over-year. Excluding food and energy, the gauge rose less than forecast.\u00a0<\/p>\n
Gasoline prices have risen in July due to military escalation in the Iran War, once again pressuring household budgets and the latest data showed the saving rate fell in June to the lowest level since 2022.<\/p>\n
Meanwhile the inflation-adjusted GDP increased an annualized 1.5% in the three months through June, lower than the 2.1% consensus.<\/p>\n
Consumers \u201clooked through the price pressures and they powered on \u2014 the question is how much longer they will be able to do that,\u201d Barclays Senior U.S. Economist Pooja Sriram told Bloomberg. \u201cTax refunds have run out and income gains are slowing, so that cushion that we point to is getting smaller in the next quarter.\u201d <\/p>\n
Related: Mortgage rate forecast resets after Fed decision<\/p>\n
#J.P #Morgan #drops #Fed #rate #bombshell #Warsh #inflation<\/p>\n","protected":false},"excerpt":{"rendered":"
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