The Fed Is Unlikely To Start Cutting Interest Rates In The Coming Months
Markets have been surging upward after the Fed's rate rises in the first part of the year devastated them. The S&P 500 is now 15% higher than it was in mid-June. The yield on the 10-year U.S. Treasury note is lower than it was in June, even though it has been steadily rising over the past 2 weeks. Even beaten-up cryptocurrencies are back on the rise.
The rebound is seen by many investors as a reflection of the belief that inflation has peaked, leading to the expectations that the Fed could start cutting rates somewhere into 2023.
According to Minneapolis Fed President Neel Kashkari, it is unrealistic to anticipate that the Fed will begin lowering interest rates in the next six to nine months.
- Kashkari said it is more likely the Fed will “raise rates to some point, and then we will sit there until we get convinced that inflation is well on its way back down to 2%,”
- Markets are likely to experience a bitter reckoning if the Fed proceeds in that direction, which may undo most of the current rally
U.S.' July Consumer Price Index Showed Some Relief
Inflation increased less than anticipated in July and was flat for the month, meaning that the price of a basket of goods and services remained largely unchanged, according to the latest consumer price index report.
Other inflation indicators which have shown easing include shipping rates and oil prices.
- According to the July Cass Freight report, although U.S. freight rates rose 28% year over year, they decreased about 2% month over month in July, suggesting that the market has likely reached its peak freight costs
- Prices for shipping containers globally have decreased slightly but freight rates are still near record highs
“The continued congestion and dislocation of supply and demand fundamentals in the logistics industry increases the uncertainty surrounding the outlook for freight rates,”, Maerks said in a statement
- The cost of energy, particularly gasoline, has decreased as a result of the decline in oil prices
“Fuel inflation was really big and that’s going to have a pretty meaningful impact on consumers and their spending patterns,” said John Leer, chief economist at Morning Consult.
Of all, one month of declining pricing in some categories does not constitute a pattern. The beginning of decreases may be signaled by a halt in price increases and falls in the costs of various goods and services, but more months of data would be required to be certain.
Forces Pushing Inflation Down in Recent Decades Could Be Reversed
“Since the pandemic, we’ve been living in a world where the economy is being driven by very different forces,”, Fed Chairman Jerome Powell on a June panel discussion in Portugal.
The current climate represents the halting or potential reversal of three processes that, by limiting employees' power to demand greater pay and businesses' ability to raise prices, pushed inflation down in recent decades.
- Globalisation: Over the past decades, global supply chains were built by multinational corporations employing new technologies with the aim of reducing costs by locating in the lowest-cost countries. Global competition further led to lower prices
After the pandemic and the war in Ukraines, businesses started moving production closer to home, purchasing from numerous suppliers and often "friendshoring", which overall raised production costs.
- Labor markets: In the 1990s, the arrival of hundreds of millions of low-wage workers from Eastern Europe and Asia helped keep labor costs and the prices of manufactured goods shipped to richer countries low.
However, the Great Resignation that started with the pandemic and already pre-pandemic declining birthrates and immigration have forced wages higher which in turn has been feeding inflation.
- Energy and commodity prices: As the world tries to move away from fossil fuels, energy and commodities companies haven't made significant investments in new production during the past 10 years, raising the possibility of more persistent shortages at a time of rising global demand
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