US Inflation Threatens, Fed Rates Could Rise Again

JAKARTA - The latest United States inflation report is expected to be back in the spotlight of market participants. Even though oil prices have started to fall, the rate of price increases in May is expected to be strong enough to increase the Federal Reserve's (The Fed) chances of raising its benchmark interest rate.

Launching a report from NBC News, quoted Thursday, June 25, market attention is now focused on Personal Consumption Expenditures (PCE) personal consumption expenditures index data. This indicator is used by the Fed as the main reference to measure inflation in the United States.

Wall Street analysts expect the May PCE rate to increase compared to April. The increase was influenced by higher oil prices and continued strong consumer spending.

For the Fed, this condition is a concern. Strong consumption can indeed support economic growth. However, at the same time, high demand also has the potential to drive up the prices of goods and services.

Fed boss Kevin Warsh reiterated the central bank remains committed to bringing inflation back to its 2 percent target. The target has not been achieved in the past five years.

A number of analysts on Wall Street now expect the Fed to still have the opportunity to raise the benchmark interest rate at least once before the end of the year as an effort to curb inflation.

The increase in interest rates makes borrowing costs more expensive. As a result, consumption and investment usually slow down so that inflationary pressures are expected to ease.

Rick Gardner, head of investments at North Carolina-based RGA Investments, said this time's PCE report will be the market's main concern.

"PCE on Thursday will become even more important for the market, especially since Federal Reserve Chairman Warsh in last week's meeting confirmed the central bank's desire to achieve price stability."

According to Gardner, the data has the potential to affect market expectations on the direction of the Fed's interest rates.

Previously, the movement of interest rates and oil prices had not been in line. This condition is considered unusual because the two generally move up together when inflationary pressures increase.

However, on Wednesday, the market direction changed again. Oil prices fell to a new post-war low. At the same time, the yield on the US government's 10-year bond fell 9 basis points to the level last recorded in April. The yield on these bonds is one of the reference costs of borrowing in the US economy.

United States Treasury Secretary Scott Bessent believes inflation is starting to move towards the central bank's target.

"Now, I believe, we are on the other side of this conflict. Gasoline prices will go down again, inflation will return to target," Bessent said after attending the Economic Club of New York event.

Still referring to the NBC News report, a number of analysts predict that Warsh may take a more dovish approach if the conflict subsides and shipping through the Strait of Hormuz returns to normal. In monetary policy, dovish refers to a stance that is more supportive of a decline in interest rates.

President Donald Trump also continued to push for a rate cut. Before serving as Fed Chairman, Warsh had questioned the traditional measure of inflation that has been used as a basis for maintaining high interest rates.

Citigroup analysts assessed that Warsh's decision to form a task force to review the Fed's approach to measuring inflation could open the way for looser monetary policy.

"Markets seem to underappreciate the implied flexibility of the task force to weigh on the drivers and measures of inflation," Citigroup analysts wrote in a note to clients.

In the stock market, the rally began to lose momentum. Throughout April and May, the S&P 500 index jumped 16 percent, mainly supported by rising technology stocks. According to NBC News, such an increase is very rare outside of the recovery period after a recession. A similar condition last occurred several months before the market crash on Black Monday 1987.

Currently, the S&P 500 index has fallen about 4 percent from its record high this month. Expectations for a rate hike have weighed on the market, although some analysts believe the previous rally has also made room for stock strength more limited.

Henry Allen, macro strategist at Deutsche Bank, said an over-sized rally had made market valuations expensive so that the chances of further gains were becoming increasingly limited.