Proactive Investors - Analysts at UBS believe the July Federal Open Market Committee (FOMC) meeting minutes show that the US is not out of the inflation woods yet as the Central Bank takes a data-dependent approach to its rate hike decisions.
The analysts noted that the July meeting minutes displayed very direct data-dependent language, in line with comments from Fed chair Jerome Powell in a press conference following the July meeting.
“At this juncture, the incoming inflation data seems likely to be welcome news for the FOMC, but inflation remains elevated, and inflation risks remain,” they wrote.
“They have come a long way and are now trying to calibrate policy to be ‘sufficiently restrictive,’ but it is too soon to declare victory. Hence, the committee favors a data-dependent approach where decisions look likely to be made meeting-to-meeting.”
The next macro marker is set to be the Fed’s annual Jackson Hole Economic Symposium, being held from August 24th to 26th.
Powell is expected to deliver an update on the outlook but UBS noted it was too early for him to declare victory and pronounce the tightening cycle is over – along the lines of his July FOMC meeting press conference.
“The backdrop for the speech will still be a chair who may see glimmers of hope in the recent consumer price index (CPI) data but remains concerned over restoring price stability and is faced with core personal consumption expenditures (PCE) inflation at 4.1%, closer to the 2022 peak than the 2% objective,” they wrote.
“In other words, the FOMC is not out of the inflation woods yet, similar to the tone in the July FOMC meeting minutes.”
They added that they expect Powell to use a lot of familiar phrases, including that additional rate hikes may be warranted.
“We would expect him to highlight data dependence, both inflation and how the labor market needs to be placed on a more sustainable path (a path not exacerbating inflationary pressures),” they wrote.
“Our guess is that he leaves enough of a hawkish edge that the door remains open to more rate hikes, even though we think he stops well short of putting a hike on the table in September.”
Recession still a possibility, analysts say
The UBS analysts noted that the Fed has taken a recession out of its baseline economic projection, but that they are not quite sure the economy has evaded the potential consequences of lending tightening.
The Central Bank is not alone in having swung to a weak growth but soft landing view, the analysts noted.
They wrote that they continue to think headwinds ahead could pose meaningful challenges to the U.S. economy.
“While consumer spending has displayed remarkable resilience (yesterday's retail sales report was quite strong), the level of spending in our view continues to rest to an unusual degree on wealth, savings and credit,” they wrote.
“Looking ahead further credit tightening, the resumption of student loan repayments, incremental federal fiscal restraint, higher interest rates, the contraction in the domestic energy sector, multifamily construction and commercial real estate, and pent-up demand fading could all contribute to economic weakening despite the sturdiness of real spending growth thus far this year.”