Full-point Fed hike chances recede on officials’ comments, data

Prospects receded for an unprecedented full percentage-point hike by the Federal Reserve this month, as two officials declined to endorse such a move and a key measure of inflation expectations cooled.

Speaking separately on Friday, Atlanta Fed President Raphael Bostic voiced wariness of a super-sized increase and St. Louis’s James Bullard said he would defer judgment to the central bank’s policy meeting later this month.

He was quoted earlier this week as saying he favored sticking with a 75 basis-point rate increase despite a hot reading for June consumer prices.

Shortly after they both spoke, data showed U.S. consumer long-term inflation expectations declined in early July by more than forecast to 2.8%, versus 3.1% the month before.

Pricing in interest-rate futures contracts currently shows a roughly one-in-six chance that the Fed will hike rates by a full point this month, with a 75 basis-point hike regarded as certain.

Bullard did favor getting rates higher than previously thought by the end of this year.

He told a virtual event hosted by the European Economics & Financial Centre that the central bank probably should increase its benchmark rate to a range of 3.75% to 4% by the end of the year, rather than 3.5%.

That implies about 2.25 percentage points of tightening from current levels.

Regarding the size of hikes at the next meeting and others this year, Bullard said: “That’s a judgment we’ll have to make about what the best strategy is.”

Bostic, speaking in Tampa, Florida, said that inflation was too high and the central bank would get it under control.

But he signaled that he did not favor a 100 basis-point increase this month.

“Moving too dramatically I think would undermine a lot of the other things that are working well,” he told an event hosted by the Tampa Bay Business Journal.

“My goal is, let’s try to fix the things that are not working while minimizing the spillover negative effects that might come to other parts of the economy.”

Bostic said he had a “Go Big” group in his bank and “every time we get to a meeting, they are like, ‘We should just go, go, go.’ I am not in that group today.”

The Fed in June raised the federal funds rate target by 75 basis points, the biggest hike since 1994, to a range of 1.5% to 1.75%.

Officials also signaled they could do so again when they meet July 26-27.

On Wednesday, investors bet that officials would be pushed into hiking by a full percentage point after data showed consumer prices rose by a hotter-than-expected 9.1% in the year through June.

Those wagers began to ease after comments Thursday by Governor Christopher Waller backing a 75 basis-point move, though he said he could lean into going bigger if data showed even forceful action was needed.

Waller specifically said he would look at the June retail sales report.

Those figures, released Friday, showed purchases climbed by a more-than-forecast 1% in a broad advance – but pointed to a leveling-off of demand once adjusted for inflation.

Officials have pivoted aggressively to fighting inflation from fighting the fallout of the pandemic, after misreading the economy late last year.

They had expected labor supply to return as vaccination levels rose and schools re-opened, easing payroll costs.

They also continued to forecast that price increases for many goods would be temporary.

Last September, policymakers forecast the personal consumption expenditures price index – the basis for the Fed’s 2% inflation target – would decelerate to 2.2% by the end of this year.

The gauge rose 6.3% in the 12 months through May.