EconomyThe Fed outlines (another) strong monetary tightening

The Fed outlines (another) strong monetary tightening

The rise in inflation of 8.3% for the US economy in August announced on Tuesday reinforced expectations that the Federal Reserve (Fed) will raise its interest rate by 75 basis points this month for the third consecutive time.

The Consumer Price Index rose 0.1% in August from the previous month and 8.3% at an annual rate, the Labor Department reported on Tuesday.

Economists had expected a small monthly decline due to falling energy prices, but the report showed an acceleration in inflation in many goods and services and an especially worrying rise in rents.

The Fed has raised borrowing costs faster this year than at any time since the 1980s to fight the highest inflation in decades.

An increase of three quarters of a percentage point at the Fed meeting on September 20 and 21 would place the monetary policy objective in the range of 3% to 3.25%, above the level that most monetary authorities believe that it will start to affect economic growth and increase unemployment.

Following Tuesday’s disappointing inflation report, Fed futures traders abandoned their bets on a possible half-point hike next week.

Market prices now reflect expectations of another 75 basis point hike and a one in five chance of a full percentage point increase, bringing the official rate to between 4% and 4.25% by the end of the year.

Monetary policymakers have downplayed a single piece of information, saying they expect to keep raising rates until there is a sustained decline in inflation.

Overall, even though prices for some items, such as airline tickets, declined, Fed policymakers’ hopes for a broader pullback were dashed.

The report “was worse than expected; it certainly added to the Fed’s resolve to remain aggressive,” Roberto Perli, an economist at Piper Sandler, wrote, adding that the Fed will need to see several months of easing in inflation before even thinking on a pause in rate hikes.

For now, he said, “we’re not even remotely close.” Consumer prices rise unexpectedly in August in the US, core inflation picks up.

With information from Reuters

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