Yes, the Fed Raised Rates Again. What Will Make It Stop?

Federal Reserve watchers were largely right. The Federal Open Market Committee again raised the benchmark federal funds rate a quarter point in its July meeting. More important were the clear indications, both in the formal discussion delivered by Fed Chair Jerome Powell and in his answers to questions, that chances remain high, though not absolute, of another rate hike in September.

That leaves the biggest question: Given the inflation slowdown in June, what will it take for them to stop the hikes and what will the new normal look like?

In the formal statement, Powell pointed to indicators suggesting that “economic activity has been expanding at a moderate pace.” Slowing to some degree have been consumer spending, activity in the housing sector after higher mortgage rates, and business fixed investment, again due to higher rates.

The jobs market has remained tight. “Over the past three months, job gains averaged 244 thousand jobs per month, a pace below that seen earlier in the year but still a strong pace,” he said. “The unemployment rate remains low, at 3.6 percent. There are some continuing signs that supply and demand in the labor market are coming into better balance. The labor force participation rate has moved up since last year, particularly for individuals aged 25 to 54 years. Nominal wage growth has shown some signs of easing, and job vacancies have declined so far this year. While the jobs-to-workers gap has narrowed, labor demand still substantially exceeds the supply of available workers.”

And inflation is still far above the 2% the Fed wants to see. “Inflation has moderated somewhat since the middle of last year,” Powell said. “Nonetheless, the process of getting inflation back down to 2 percent has a long way to go. Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.”

This was box-ticking to establish that another hike is plausible in September. “We’re looking for moderate growth. We’re looking for supply and demand through the economy coming into better balance, including in particular in the labor market. We’ll be looking at inflation. We’ll be asking ourselves, does this whole collection of data, do we assess it as needing to raise rates further? And if we make that conclusion, then we will go ahead and raise rates. That’s how we’re thinking about the next meeting and how we’re thinking about meetings going forward potentially.”

He pointed to two more job reports, two more CPI reports, an employment compensation index report out soon, and other data that will “inform our decision as we go into that meeting. I would say that it’s certainly possible that we would raise funds again at the September meeting if the data warranted, and I would say it’s possible that we would choose to hold steady at that meeting.”

Powell did address the drop in inflation in June, saying, “The June CPI report of course was welcome, but it’s only one report, one month’s data. We hope that inflation will follow a lower path … but we don’t know that.”

And, in answering a question, he said, “At the margins, stronger growth could lead over time to higher inflation and that would require an appropriate response from monetary policy.”

The answers, and projections of potential for at least one additional hike this year, struck some in CRE badly.

“Do I think they should have done something different? Yes,” said Moody’s Analytics’ Head of Commercial Real Estate Economics, Thomas LaSalvia in a statement. “Lag in shelter spot prices and PPI (wholesale prices) getting into final goods and services prices, mean there should be a good amount more of a decline coming without another hike.  One more meeting of a pause, with two more jobs reports and CPI reports before the next meeting in September would have given enough data to truly determine the best next steps.  Powell counters this with core inflation still being too high, and needing to see better supply and demand balance, particularly in the labor market.”

Or, as LaSalvia said in summation, “Given this policy move, along with other economic data over the last couple of months, show that ‘higher for longer’ is here to stay, and that the economy and CRE will be in a transition period.”