The Zhitong Finance App learned that US inflation has been higher than the Federal Reserve's 2% policy target for five consecutive years, and the patience of decision makers is constantly being tested. Although interest rates remained unchanged at the Federal Reserve's July interest rate meeting, more and more officials began to believe that interest rate hikes should be resumed as soon as possible to prevent high inflation from solidifying; other officials advocated continuing to observe the data, believing that there is still hope that inflation will fall back without further tightening policies. As the September interest rate meeting approaches, differences within the Federal Reserve over whether to raise interest rates are becoming more obvious.
Inflation continues to be high, and the Fed's internal interest rate hike camp expands
In July, the Federal Reserve maintained the federal funds rate target range of 3.5%-3.75% for the fifth time in a row. However, at the meeting, three voting officials already supported a 25 basis point increase in interest rates, and recently many non-voting officials have publicly expressed similar views, indicating that the support for further policy tightening is expanding.
Meanwhile, officials who still support staying on hold believe that it is still possible to rely on time to reduce inflation naturally, but patience for continuing to tolerate price shocks is also weakening.
James Egelhof, chief economist in the US at BNP Paribas, said that there is still great uncertainty in the current economic data, which is not enough to prove what kind of scenario is happening, but due to a lack of substantial improvement in inflation, the pressure on the Federal Reserve to take action continues to rise.
The cooling of the job market has failed to calm policy debates
According to the July non-farm payroll data released last week, the number of people employed in the US unexpectedly fell by 23,000, and the employment data for the previous two months was also drastically revised, once again raising market concerns about the weakening labor market.
However, this employment report did not provide a clear direction for the Federal Reserve's policy discussions.
Richmond Federal Reserve Chairman Barkin said that currently the labor market is still in a “fragile balance” state that has continued to exist for the past year and a half, and has not become a major factor driving up inflation.
Market focus has turned to inflation data to be released in the next few weeks, including the consumer price index (CPI) to be released next week, which will be the most important reference basis before the September interest rate meeting.
According to the economic forecast released by the Federal Reserve in June, officials still expect inflation to return to the target level of 2% in 2028. However, as of June of this year, the US CPI still rose 3.5% year on year, and core PCE after excluding food and energy also rose 3.3% year on year. Market concerns about whether the Federal Reserve can successfully achieve this goal are intensifying.
“Keep watching” or “raise interest rates immediately”? The opinions of officials are divided
Officials who support keeping interest rates unchanged believe that some of the current inflationary pressure may be a temporary factor, and raising interest rates may not necessarily be the best option.
Claudia Sahm, a former Federal Reserve economist and chief economist at New Century Advisors, said that the biggest challenge facing the Federal Reserve now is how to distinguish between cyclical factors and structural factors affecting inflation and employment, and monetary policy is more suitable for dealing with the former.
Federal Reserve Governor Cook said this week that at present, some factors conducive to falling inflation have begun to take effect, including the gradual weakening of the impact of tariffs, a possible fall in oil prices in the future, and the price pressure brought about by artificial intelligence investment is expected to ease. Raising interest rates too soon could have an unnecessary impact on the job market.
New York Federal Reserve Chairman Williams also said that he still expects inflation to return to 2% by 2028, and the overall judgment has not changed significantly.
After the release of weak employment data, the interest rate futures market's expectations for the September rate hike have dropped from more than 50% to about 40%.
However, officials supporting interest rate hikes believe that the Federal Reserve doesn't have much room to wait.
Minneapolis Federal Reserve Chairman Kashkari, Dallas Federal Reserve Chairman Logan, and Cleveland Federal Reserve Chairman Hamak, who voted for interest rate hikes during the July meeting, all said that if delays continue, the rate hike may have to be further expanded in the future.
In addition, Kansas City Federal Reserve Chairman Schmid also said this week that in a context where consumer demand and corporate investment are still strong, he does not think the current monetary policy is restrictive enough, so he supports further tightening of the policy to curb inflation.
Walsh remains silent, and the market focuses on the credibility of the Federal Reserve's policies
Compared to increasingly open policy differences among officials, Federal Reserve Chairman Walsh's attitude appears to be more cautious.
After the July interest rate meeting, Walsh once again emphasized that the Federal Reserve will firmly maintain price stability, but declined to disclose the future interest rate path, nor did he specify under what economic conditions it would choose to raise interest rates.
Due to a lack of forward-looking guidance, the market once sold off long-term US Treasury bonds. The yield on long-term treasury bonds rose markedly, and market inflation expectations also rose at the same time.
St. Louis Federal Reserve Chairman Mussalem said that this market reaction once again shows that the Federal Reserve needs to continuously maintain the credibility of its own policies through effective communication and necessary actions.
Torsten Slok, chief economist at Apollo Global Management, said that the current problem is not just economic data, but the Federal Reserve's policy credibility. “U.S. inflation has been above target levels since 2021, a very long process for the world's most important central banks.”
Mark Zandi, chief economist at Moody's Analytics, said that in a situation where the Federal Reserve's policy statement is more simplified and Walsh rarely reveals policy ideas, it has become more difficult for the outside world to judge the FOMC's internal position. As the September interest rate meeting approaches and the Jackson Hole Global Central Bank Annual Meeting at the end of the month, the market expects that the debate within the Federal Reserve over whether to raise interest rates will continue to heat up.