Chief Economist Eugenio J. Alemán discusses current economic conditions.
Markets are convinced that the Federal Reserve (Fed) is going to pause its interest rate campaign after it finalizes its Federal Open Market Committee (FOMC) meeting on Wednesday, September 20. While markets are trying to guess what the Fed is going to do, they are not the ones that conduct monetary policy. Monetary policy is the realm of the Fed, which is the country’s central bank.
However, we agree that many times, the Fed does what the market is expecting it to do and, today, markets are expecting the Fed to stay put or pause in September. However, unless Fed officials change their minds regarding interest rates when they release the new dot-plot on Wednesday, even if they pause in September, we should expect the Fed to increase interest rates once more before the end of this year.
But before speculating what the Fed is going to do next week and the information contained in the Summary of Economic Projections (SEP) and the ensuing dot plot, let’s backtrack to June’s FOMC decision to pause, which was followed by an even more startling decision to increase rates once again in July. Why were we startled by these decisions? First of all, because we asked this question: Why did you pause if you were going to increase rates again in July? There wasn’t a ton of new information in July to prompt a move. Second, the rate of inflation for June, which Fed officials had access to when they convened for the July FOMC meeting, was very benign, with both the headline Consumer Price Index (CPI) as well as the core CPI printing a 0.2% monthly rate. Furthermore, both the headline CPI and the core CPI were still coming down on a year earlier basis.
However, today, oil and gasoline prices are putting pressure on headline CPI and that measure has increased for two consecutive months on a year earlier basis, from a ‘low’ of 3.0% in June to 3.2% in July, to now 3.7% in August, not very comforting if you ask us, in terms of monetary policy effectiveness. True, core CPI has continued to come down on a year-over-year basis, and that is very good news for the Fed. However, that rate was still elevated, at 4.3% in August, with services prices increasing more than expected during the month.