New data gives Fed wiggle room on rates at July meeting

Federal Reserve officials have come out in favor of a three-quarter percentage point interest rate hike at their meeting later this month, leaving open the possibility of a larger move if economic data is especially strong. New economic figures released on Friday could give them a reason to move in either direction.

In particular, a closely watched measure of long-term inflation expectations moderated. That should give central bankers confidence that high prices aren’t becoming so ingrained in the American psyche that they become a self-fulfilling prophecy as people demand higher wages and change their spending patterns.

The data could be critical in keeping officials on track for a three-quarter percentage point rate hike: Stocks soared on the news, suggesting investors saw it as a sign the Fed won’t do a big rate move this month, which had spooked the markets.

Krishna Guha, an analyst at Evercore ISI, wrote in a note after Friday’s data that the inflation expectations figure would likely “pull the Fed out” of a full point rise.

At the same time, retail sales were unexpectedly strong, suggesting that demand is picking up despite the Federal Reserve’s efforts to contain it with higher interest rates. That could provide grounds for a full points rate increase. “Today’s strong report keeps the Federal Reserve in an aggressive policy tightening mode,” wrote Kathy Bostjancic, chief US economist at Oxford Economics, after the statement.

Those two new readings on the economy come on the heels of a higher-than-expected June Consumer Price Index reading, which pushed inflation to a new four-decade high and showed signs that price gains are widening. to rentals and services that could take time to cool off again.

Several Fed officials have said in the wake of that report that they would still favor a three-quarter point hike at the central bank’s July 26-27 meeting, but would watch US spending and inflation expectations data. consumer to determine if a larger move was necessary. With data showing consumption remaining strong but inflation expectations becoming less of a concern, they are likely to leave the central bank’s options open.

Still, both data points are reviewed, making it difficult to take a definitive signal from either. The University of Michigan’s inflation expectations number for July, down to 2.8 percent on preliminary data from an earlier reading of 3.1 percent, will be followed on July 29 by a final number for the month that could be different.

Most officials have signaled that a three-quarter point increase remains their preference, while avoiding ruling out a full point move altogether. Markets now see a full point rise as possible, but not likely.

Central bankers have been reluctant to embrace a rate move larger than the three-quarter-point hike they made last month, already the largest since 1994. Raphael Bostic, president of the Federal Reserve Bank of Atlanta , said Friday morning at an event in Florida that he wouldn’t want to move rates “too dramatically.”

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