The US Federal Reserve may almost be at the end of its monetary policy tightening cycle on the back of the latest consumer price index (CPI) data in the US.
Headline inflation rose by 3.0 per cent in the 12 months to the end of June, the smallest annual increase since March 2021 and down from the 4.0 per cent lift seen in May. This result was also below market expectations for a 3.1 per cent rise.
Month-on-month, headline inflation rose by 0.2 per cent in June, an acceleration compared to the 0.1 per cent increase seen in May but below the 0.3 per cent lift expected by the market.
Meanwhile, on an annual basis, the core CPI measure of underlying inflation fell from 5.3 per cent in May to 4.8 per cent in June, the lowest increase since November 2021.
Seema Shah, chief global strategist at Principal Asset Management, said the latest data showed that inflation was improving faster than had been expected.
“Despite a significant move in the right direction, inflation remains well above the Federal Reserve’s target level, and today’s print is unlikely to convince the Fed that their tightening cycle is complete,” she noted.
However, Ms Shah said that Principal’s long-held forecast is for only one more 25 basis point rate hike by the Fed this year, taking the policy rate to 5.25–5.50 per cent.
“These numbers suggest that inflation is easing across many categories. However, they may also be the result of rapid Fed rate hikes of the past year impacting growth,” said Ms Shah.
“Given the strength of the labour market and the fact that core inflation remains elevated and sticky, an additional interest rate hike at the Fed’s meeting later this month remains highly likely.”
Similarly, GSFM investment strategist Stephen Miller said the CPI report indicates that inflation has “meaningfully turned” and that the end of the Fed’s tightening cycle is within sight.
“The best guess now must be that the path for the Fed from hereon in the cycle is ‘one and done’. Any policy rate cuts, however, are well into 2024 and despite the relatively good news on inflation, I expect the Fed to retain its ‘higher for longer’ mantra,” he said.
Mr Miller suggested that given the nature of the Fed’s communication since its last meeting, it was “difficult to see the Fed eschewing a further policy rate increase when it meets in late July”.
“However, such an increase will be framed as ensuring the vanquishing of inflation and the subsequent 5.25–5.50 per cent target would almost certainly represent the peak policy rate for the current cycle,” he said.
The Fed will announce its next interest rate decision on 26 July. Locally, the Reserve Bank of Australia is expected to hike by 25 basis points when it meets in August, according to a number of senior economists.
