Fed Set to Raise Rates in July Despite Inflation Slowdown

(Bloomberg) — Federal Reserve officials appear poised to resume interest-rate hikes this month after data showed inflation cooled sharply in June but remains above the central bank’s target.

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The so-called core measure of the consumer price index — which excludes volatile food and energy prices — advanced 4.8% from a year earlier, data out Wednesday showed. That was the smallest increase since late 2021 and could give the Fed room to pause rate increases after its July meeting if the trend continues, economists say.

But Richmond Fed President Thomas Barkin said the growth in US consumer prices is still too quick even as it slowed in June, reiterating the central bank’s commitment to restoring inflation to its 2% goal.

“Inflation is too high,” Barkin said Wednesday in Arnold, Maryland. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”

The consumer price index rose 3% in June from a year earlier, the Bureau of Labor Statistics said. The report offered welcome news for policymakers who have been bearing down on price pressures. Continued relief in the core services categories — watched closely by Fed officials — could give them flexibility to pause or potentially halt rate hikes after this month, economists say.

“I definitely think that what we’re seeing today supports this slower pace of tightening,” said Gregory Daco, chief economist for EY, adding that the report showed a decline in airfare, hotel prices and housing costs. As inflation eases, that will also make real interest rates more restrictive and could lessen the need for further increases after this month, Daco said.

“In our opinion, this is the last rate hike of this cycle,” Daco said of the rate increase expected when officials gather on July 25 and 26.

The majority of Fed officials see interest rates moving higher this year to deal with a slower-than-expected cooling of price pressures and a persistently strong labor market. The Fed held policy rates steady last month, signaling a slower pace for rate moves to evaluate how the economy was responding to 10 straight increases and March’s banking turmoil.

Fed Chair Jerome Powell said last month he wasn’t ruling out two consecutive hikes this year from the current range of 5% to 5.25%.

Minneapolis Fed President Neel Kashkari said separately that banks must be prepared for higher interest rates in case policymakers need to lift rates further to combat entrenched inflation.

Markets currently expect inflation and interest rates to fall, in which case bank balance-sheet pressures would likely ebb, Kashkari said.

“However, if inflation proves to be more entrenched than expected, policy rates might need to go higher, which could further reduce asset prices, increasing pressure on banks,” he said in an essay published Wednesday. “In such a scenario, policymakers could be forced to choose between aggressively fighting inflation or supporting bank stability.”

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