Tomorrow is the start of the Fed’s pre-rate-decision blackout period, in which members of the FOMC won’t speak to the press. In anticipation of that, a bunch of them have done interviews at the end of this week. Investors have been keenly focused on that because of a non-typical timing issue this time around. The release of US CPI figures next week happens to coincide with the Fed’s blackout period. Which means there won’t be a chance to gauge FOMC members’ reactions to the data before traders have to take position for what the Fed might do.
So, the recent comments from Fed officials have gotten extra scrutiny, and they seem to be falling into a pattern: They don’t know if they are going to hike. The market overwhelmingly thinks there won’t be a hike this time around. The crux of the issue likely isn’t whether or not there will be a rate hike in the September meeting. Rather, it’s how strong the statement will be in regards to a rate hike after that, which is where there is just under 50% of traders who expect the final hike of this cycle.
The divided outlook
There have been a lot of headlines about US inflation, and the consensus now is that headline inflation next week will be reported to have moved higher. This is because of a combination of base effects and higher fuel prices. US gasoline prices have hit a 10-year seasonal high, and that will likely be reflected in the CPI number. But, the Fed cares more about the core rate, which is expected to continue to tick down. As long as that pattern is maintained, the expectation is that the Fed won’t hike.
But it’s more than that, given the Fed’s dual mandate. The situation in the labor market has come under increased focus. While the NFP figures showed that the labor market is weakening, the most recent jobless numbers suggest that the market remains tight. So, markets are looking closer at comments from Fed officials on how much they weigh the labor market in the context that higher wages could keep inflation elevated. An insistence on being “data dependent” by the Fed might make things easier for FOMC members, but given how the data is unclear and sometimes contradictory, it makes it harder for investors to figure out what the Fed will actually do.
What’s been said
First to talk was FOMC voter Williams, who said that inflation was still too high, but moving down. He also said that whether rates are sufficiently restrictive is still an open question for the Fed. But he stuck to a theme that has been the defining trait of Fed-speak lately: Need more data before making a decision on the next move.
Some analysts interpret the “need more data” comment as a hint that the Fed will “skip” or “pause” at the next meeting, saying that it needs time to acquire and assess more data. This is a standard position taken by central banks in the past.
Bringing it all together
FOMC voter Logan was a little more explicit on that point, saying it could be appropriate to “skip” at the next meeting. But she also said she wasn’t convinced that excess inflation had been extinguished. That seems to imply a message that no rate hike at the September meeting would include a strong hint that more tightening could be coming. FOMC voter Goolsbee was a little more dovish, suggesting that the time had come to talk about how long rates should remain high instead of whether or not they should be raised.
Markets appear to have taken the view that in sum the Fed would likely keep policy unchanged at the next meeting, as the consensus firmed up a bit. Yields slid slightly as well. That implies an expectation that core inflation will fall when it’s reported next Wednesday. A surprise there could shake up the markets considerably, given that the Fed officials that have spoken so far were still worried about getting inflation down.