Fed is still underestimating the persistence in inflation – Rabobank
|The FOMC will meet next week. Market consensus is for a 75 basis points rate hike. Analysts at Rabobank also expect such a hike and the balance sheet reduction schedule to rmain unchagned. They think that the Fed is still underestimating the persistence in inflation.
Key Quotes:
“We expect the FOMC to raise the target range for the federal funds rate by 75 bps to 2.25- 2.50%. Meanwhile, the balance sheet reduction schedule is expected to remain unchanged, with a $47.5 billion per month reduction through August, followed by $95 billion per month from September.”
“We think that the Fed is still underestimating the persistence in inflation, and has yet to acknowledge that a wage-price spiral has already started in the US. US CPI inflation rose to 9.1% in June and its core measure stands at 5.9%. With shelter already at 5.6% year-on-year and rising, core inflation is likely to remain persistent. Keep in mind that shelter accounts for 41% of the core CPI and tends to lag house prices. Shelter is likely to rise above 6.0% year-on-year later this year and remain elevated next year. At the same time, nominal wages have risen by 6.7% year-on-year in June according to the Atlanta Fed’s wage growth tracker. This does suggest that the wage-price spiral that the Fed still hopes to avert, is already here.”
“After a 75 bps hike on July 27, we expect 50 bps hikes at each meeting in the remainder of the year. This would raise the target range for the federal funds rate to 3.75-4.00% by the end of the year, which is more than indicated by the FOMC’s dot plot (3.4%) and futures markets (3.43%).
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.