US economy in 'uncharted waters' as inflation falls with low unemployment - study
WASHINGTON (Reuters) -U.S. Federal Reserve officials are in "uncharted waters" without clear historical guidance as they set monetary policy in an environment with falling inflation but no rise in the unemployment rate yet, Richmond Fed staff said in a new research report analyzing the central bank's rate cycle. they considered "unlike others".
"The current cycle is the first time in the entire postwar period that the (Federal Open Market Committee) has made significant progress in reducing inflation without an associated increase in the unemployment rate," wrote Richmond Fed staff, including chief adviser Pierre-Daniel Sarte. paper, published Wednesday on the bank's website.
"The current rate episode sees us in uncharted waters," with the Fed facing the widest gap in history between inflation and the federal funds target as officials begin tightening monetary policy in March 2022, and now seeing the unemployment rate remain steady and low despite the fastest-ever rise in interest rates rates for at least 40 years, the researchers wrote.
Whether this kind of free fall in inflation can continue will be central to the Fed's discussion in the coming weeks as policymakers decide whether they have pushed interest rates high enough or whether more rate hikes are needed.New Data Released The Consumer Price Index rose at a 3.2% year-over-year pace in July, up slightly from June's 3% reading.
However, underlying price trends showed a continued slowdown. After stripping out volatile food and energy costs, the annual "core" CPI fell to 4.7% in July from 4.8% in June, largely driven by housing costs, which Fed officials believe are they will permanently moderate.
Prices for a wide range of goods and services, from airline travel to medical care, fell last month from the previous month. "Disinflationary pressures continued to build," wrote Paul Ashworth, chief North American economist for Capital Economics. July CPI data.
Excluding housing prices along with food and energy, something the Fed itself does to gauge the breadth of inflation across parts of the economy where officials worried inflation was becoming more entrenched, Ashworth calculated that the CPI actually fell from the month to month and increased by only 2.5% on an annual basis.
"The Fed is close to meeting its goal of price stability," he said. Traders in Fed rate-linked contracts matched bets that the central bank will raise rates again, giving just a one-in-four chance of another rate hike at any of the Fed's three remaining meetings in 2023.However, one Fed official said it was still too early to call a rate decision for the Fed's upcoming September 19-20 meeting, with more information to come on prices and jobs.
"Whether we hike another time or keep rates steady for an extended period of time -- those things are yet to be determined," San Francisco Fed President Mary Daly said in an interview with Yahoo Finance. “It would be premature to predict what I think would happen because there is a lot of information coming in between now and our next meeting.Still, the direction for the Fed has been good so far, with CPI inflation falling from a peak of 9.1% in June last year.
The Fed has raised the federal funds rate by 5.25 percentage points from March 2022, with policymakers approving rate hikes at 11 of the past 12 meetings in a series of measures to discourage borrowing and spending and slow both the economy and the pace of price growth. .
This would typically be associated with a jump in unemployment as businesses and consumers retreat. Still, the unemployment rate has remained below 4% — the lowest for the U.S. — since February 2022 and stood at 3.5% as of last month.
Fed policymakers have offered various interpretations of why this is happening, from a "labour hoarding" among firms marked by how hard it has been to hire during the pandemic to inflation that may have been largely caused by problems in supply chains that have slowly were correcting. Others believe that the economy is still slowly adjusting to higher interest rates and that the unemployment rate will eventually rise before the Fed finishes its fight against inflation.
As Fed officials analyze these kinds of nuances, they will determine whether they will raise rates again at some point this year — the majority view among policymakers according to their latest projections released in June — or decide that the current range of target interest rates between 5.25% and 5.5% is adequate.
In June, one closely watched price gauge, the personal consumption expenditure price index excluding food and energy, was still more than double the Fed's 2% target. Only two Fed officials have so far said publicly they believe there is no need to raise rates, while others say they want to have the "completeness" of the data in hand before making a decision.Given the unique circumstances, researchers at the Richmond Fed noted risks on both sides.
The current Fed "has so far been uniquely successful in reducing inflation while keeping the unemployment rate at its lowest levels in roughly half a century," they wrote, with the potential that policy tightening to date "could cause inflation to fall further without a dramatic increase in the unemployment rate." This would be a first in the post-war economic experience of the US.'Still, "with little guidance from past rate cycles, the FOMC will need to remain vigilant to avoid missing its target should the economy prove more resilient than expected."Reporting by Howard Schneider; Edited by Andrea Ricci, Christina Fincher and Jonathan Oatis
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