The upcoming Fed meeting is set for July 14, and two notable hawks have stated their support for an increase at that time. However, they are not certain if the increase will be sufficient to spur the economy. This is the case in spite of the mixed data from last week, as well as poor housing numbers. Also, last week, the University of Michigan’s sentiment index showed a sharp decline in consumer confidence.
In June, the Federal Open Market Committee voted to increase interest rates by 75 basis points, the largest one-month increase since 1994. Waller said he supports a 75-bps hike at the July meeting. This week’s economic data includes retail sales data, which is expected to jump 0.9% in June but is not adjusted for inflation. Meanwhile, the UK CPI, Retail Sales, and Jobs data are due this week.
Most economists expect the Fed to raise rates at the end of the year, but many others are expecting them to slow down the rate hike. Economists said they expect the federal funds rate to remain between 3.25% and 3.5% by year’s end. In addition, many economists expect inflation to remain above the two-percent target for several years, especially after the Fed raises rates. However, several Fed officials criticized the idea of a 75 basis point hike.
Market participants took note of these statements, and noted that Atlanta Fed President Raphael Bostic said that going bigger than three-quarter points might lead to people feeling more cautious. In addition to Bostic’s remarks, a new survey from the University of Michigan also showed that consumers’ inflation expectations had weakened over the month. This data is helping policymakers evaluate the bigger picture.
The market reaction to higher interest rates has slowed down the economy and punished stock prices. The S&P 500 is down 18% this year, but the economy still shows signs of growth. Nonfarm payrolls increased by 268,000 in June, and the monthly employment report will be released Friday. According to Bullard, the US has a “good chance” of soft landing, but risks remain.
Market rates are near a peak of 3.5%. The belly of the US curve has reached that level recently. The curve has subsequently become richer, suggesting that market rates have peaked. Despite the market’s expectations, the Fed will see a significant fall in expectations for inflation in the next few years. The fall in the 10yr inflation breakeven rate is particularly impressive.