The Fed Calls Travel To Lower US Inflation Still Long

JAKARTA - The US Central Bank, the Federal Reserve (The Fed) has a long scheme to return inflation to its target of 2 percent. Although, inflation has fallen in recent months.

U.S. inflationary pressure continues to rise, and the process of reducing inflation to 2.0 percent is still far away, Fed Chair Jerome Powell said on Wednesday (21/6/2023) in his remarks at a half-year hearing organized by the Financial Services Committee with the US House of Representatives.

Citing Antara, over the 12 months ended in April, the total price of personal consumption expenditure (PCE) rose 4.4 percent and the price of core PCE, excluding volatile categories of food and energy, growing 4.7 percent from last year, according to statistics issued by the Economic Analysis Bureau under the US Department of Commerce.

It will be more difficult for the Fed to tame core inflation because monetary policy has its own problems.

Fed officials recently raised core inflation projections for 2023 to 3.9 percent, up from 3.6 percent, with core inflation in 2024 expected to last at 2.6 percent.

Reducing inflation is likely to require a period of growth under trends and some softening of labor market conditions, Powell noted.

"This will require a period of growth under a prolonged trend or a mild drop to bring PCE inflation to a target of 2.0 percent of the Fed above expectations, and our forecast assumes the latter," Bank of America Global Research strategist said in a mid-year review.

The Fed is expected to raise the benchmark interest rate by 50 more basis points in 2023 despite choosing to quit in June after ten consecutive interest rates since last March.

"We will continue to make meeting-to-meeting decisions, based on the totality of incoming data and its implications for the prospects for economic and inflationary activities, as well as risk balance," Powell said.

"No decision was made for the Fed's monetary policy meeting in July," Powell said on June 14 when the Fed decided to maintain its federal interest rate unchanged after ten consecutive gains since last March.

The 30-day Fed fund now estimates nearly 80 percent of another possible 25-base point increase in July, according to data from the CME FedWatch tool on Wednesday (21/6/2023).

The Fed will raise interest rates by 25 basis points in July followed by another 25 basis points increase in September, according to Bank of America Global Research.

The interest rate hike may seem unwarranted given current inflationary data, according to a year-end mid-prespect report launched by UBS on Tuesday (20/6/2023).

If inflation doesn't go down as expected by the Fed by the end of 2023, "You'll see a stronger response from the Fed," said Mark Haefele, head of investment at UBS Global Wealth Management at a virtual media round table meeting on Tuesday (20/6/2023).

While the Fed has indicated its intention to continue rising interest rates, the latest monetary statement shows deep divisions to the Federal Open Market Committee (FOMC) that needs to be bridged to reach consensus, according to a UBS report.

"In addition, we think it will be more difficult to restart the increase as the US presidential election season draws near," UBS strategist said in the report.

Investors may now need to consider that "The Fed may be willing to keep inflation moderately above the target for a long period of time," the UBS report said.

However, the longer inflation lasts at a high level, the more likely consumer inflation expectations will rise, which will have bad implications for the economy.

Fed officials will not change the expectations of their inflation anytime soon and the market will not expect that to happen, according to Haefele.

US consumers' long-term inflation expectations remain high at 3.0 percent in June, higher than the 2.2 percent to 2.6 percent range in the two years before the COVID-19 pandemic, according to a recent survey by the University of Michigan.