July inflation reported at 1.7%
The US inflation report, which was released on August 11, indicated that inflation has risen 1.7% YoY (year-over-year). US inflation is one type of data that drives market expectations with regards to the Fed’s action. Slowing inflation (TIP) has been a concern for the Fed and many FOMC members. More weakness in inflation could be mean a delay in rate hikes from the Fed. The Fed has raised interest rates three times this year. It’s expected to increase interest rates one more time in 2017 and take the US interest rate from 1.25% to 1.50%. The Fed has termed the slowdown in growth and inflation (VTIP) in the first quarter as “transitory.” However, the Fed changed its tone in the recent meeting. The statement that was released after the July meeting indicated that it would take longer than expected to reach the 2% inflation goal that the Fed has set for itself.
Is July’s inflation good enough?
Markets expected the inflation growth for July to be reported at 1.7%—below the Fed’s target rate of 2%. A steady decline in inflation has contributed to volatility (VXX) in the bond (BND) and currency markets (UUP). According to the fed funds futures, the probability of another rate hike this year is below 50%. The inflation report for July didn’t revive the hopes for another rate hike this year.
Lower inflation will likely derail the Fed’s plans on monetary tightening and could impact its plans to reduce the size of its balance sheet. The Fed would need more evidence in the form of improved inflation before it hikes rates again. In the next part of this series, we’ll analyze how improved July retail sales impacted the Fed.