Inflation and Interest Rate Assessment from US Federal Reserve Officials

US Federal Reserve (FED) officials made statements evaluating the interest rate and economic agenda after the inflation report. While Fed officials underlined that inflation was not at the desired level, markets rallied.

After inflation exceeded 9 percent in June, hitting its 40-year peak, the US recorded a decline to 8.5 percent in July, according to data released yesterday. On a monthly basis, there was no change in prices. After the data, the markets included the Fed's expectations for the September meeting, while the markets rallied after expectations of a softening in monetary policy. Chicago Fed President Charles Evans commented that yesterday's data was the first positive reading on inflation since the Fed started tightening. Minneapolis Fed President Neel Kashkari underlined the need to raise interest rates further, even if it causes a recession. San Francisco Fed President Mary Daly also described the data as 'good news'. The loss of inflation also changed the markets' expectations from the Fed. After the last monetary policy meeting, Fed Chairman Jerome Powell's statement that interest rate hikes may slow down at some point was bought by the markets. However, Chairman Powell added that the Fed would monitor the data to do so. Chicago Fed President Charles Evans stated that inflation is still 'unacceptably' high. Charles Evans stated that he expects inflation to approach 2.5 percent next year, adding that he does not expect the economy to slow down significantly anytime soon. Evas noted that he expects the Fed to raise its policy rate, currently at 2.25-2.5 percent, to 3.25-3.5 percent this year and to 3.75-4 percent by the end of next year. San Francisco Fed President Mary Daly also did not rule out the possibility of a 75 basis point hike in an interview with the Financial Times. But she expressed initial support for the Fed to slow the pace of interest rate hikes. Commenting on the latest inflation report, San Francisco Fed President Mary Daly said, "There is good news in the monthly data that consumers and businesses are getting some relief. But inflation is too high and not close to our price stability target." Daly noted that they expect interest rates to rise to near 3.5 percent by the end of the year and that this level will restrict business and consumer activity. In the pricing in the money markets after the inflation data, it was predicted that the Fed would raise interest rates by 50 basis points with 58.5 percent probability and 75 basis points with 41.5 percent probability at the September meeting. After the data released yesterday, the markets also rallied after the expectation that the Fed would step on the brakes. The New York stock exchange completed the day with a "rally" after better-than-expected July inflation data in the US. At the market close, the Dow Jones index gained over 500 points and increased by 1.63 percent to 33,309.51 points. The S&P 500 index increased by 2.13 percent to 4,210.23 points, the highest level since early May, while the Nasdaq index gained 2.89 percent to 12,854.81 points.