Fed Monitor: Data Remains Ambiguous

Summary of Key Issues

The evolution of the SEP end-2023 inflation and unemployment forecasts shows the Fed is much more focused on the employment than on the inflation leg of its mandate (Chart 1). The Fed has already announced a rate hike at the 26 July FOMC meeting and another hike in 2023 (Chart 2).

Hawks and doves are mainly divided on two things:

• Whether the impact of policy tightening so far has already fully transmitted to the economy.
• Whether the banking crisis will tighten credit conditions above and beyond what is typically associated with a Fed tightening cycle (Charts 8 and 9).

The data continues to be ambiguous with strong growth but stable inflation (Charts 11 and 12).  The low June YoY headline CPI print has been interpreted by many market participants as the start of an inflation downtrend even though it reflects largely base effects and a 17% YoY decline in energy prices. Falling energy prices are hiding strong underlying inflation dynamics (Chart 10 and 13). 

I continue to expect a second 2023 hike in November. This is based on continued MoM core inflation prints around 30bps as well as Chair Jerome Powell’s June announcement that the FOMC was slowing rate hikes.

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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)