It didn’t take long. The pixels were barely dry on yesterday’s CPI inflation report–headline inflation fell to a year-over-year rate of 8.5% in July from 9.1% in June–before members of the Federal Reserve warned that the stock market rally on the news was based on a misreading of the Fed’s likely reaction to the lower CPI inflation rate.
Minneapolis Fed President Neel Kashkari said Wednesday that he wants the Fed’s benchmark interest rate at 3.9% by the end of this year and at 4.4% by the end of 2023.
“I haven’t seen anything that changes that,” Kashkari said, responding to a question about the CPI report.
Charles Evans, president of the Chicago Fed, welcomed the news Wednesday, but added that inflation remains “unacceptably high.” He said he expects “that we {the Federal Reserve] will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective.”
San Francisco Federal Reserve President Mary Daly, in remarks after the CPI data, said that it was far too early to “declare victory” in the central bank’s inflation fight, according to a Financial Times report. She didn’t rule out a third consecutive 75 basis-point increase in September and pushed back on investor expectations of a turn to rate cuts in 2023 while signaling support for a slowing in the pace of rate hikes.
On the issue of when/if the Fed might start to cut rates, Kashkari said it was not realistic to conclude that the Fed will start cutting rates early next year when inflation is very likely still going to be well in excess of the 2% goal.
“I think a much more likely scenario is we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates,” he said.
Evans said he expects the target range for the central bank’s benchmark rate– now 2.25% to 2.5%–to rise to 3.25% to 3.5% by the end of the year, and to 3.75% to 4% by the end of 2023.
Of course, we won’t know exactly what the Fed decides until the actual vote in the Open Market Committee on September 22. Today, August 11, the CME FedWatch Tool put the odds of a 50-basis-point increase at 59.5% and of a 75-basis-point at 40.5%. Yesterday the Tool put the odds of a 50-basis-point increase at 58% and of a 75-basis-point move at 42%.
