"New Fed News Agency": The Fed is not yet ready to announce victory over inflation.

On Thursday, July 27th, the Federal Reserve will announce its interest rate decision for July. On Monday, Nick Timiraos, a journalist from The Wall Street Journal, also known as the "New Fed News Agency," published an article titled "Why the Fed Isn't Ready to Declare Victory over Inflation." Due to the uncertainty of inflation trends, it is difficult to predict the Fed's next steps after the rate hike on Thursday. The inflation data released on July 10th showed that the US Consumer Price Index (CPI) rose by 3% year-on-year in June, lower than the expected 3.1%, reaching the lowest level since March 2021. The core CPI, which excludes food and energy, increased by 4.8% year-on-year, lower than the expected 5%, reaching the lowest level since October 2021. The unexpectedly slow inflation has led many market participants to believe that the rate hike is nearing its end. Nick Timiraos pointed out that the Fed is expected to raise rates by 25 basis points at this meeting. However, some Fed officials and economists are concerned that inflation relief may only be temporary, and potential price pressures may persist, requiring the Fed to raise rates and maintain them for a longer period. They believe that there are too few slack factors and excessive demand in the economy, making it unreasonable to expect the inflation rate to return to the Fed's 2% target within the next few years. They do not agree with the recent optimistic view of investors that inflation can continue to ease without the economy entering a recession. Many economists are concerned about strong wage growth. They believe that if there is no economic downturn, labor market tightness will push up the core inflation rate next year. According to the US Bureau of Labor Statistics' Employment Cost Index, wages and salaries increased by 5% year-on-year from January to March. This index is the most comprehensive measure of wage growth and one of the data points that the Fed is most concerned about. The second-quarter data will be released on July 28th. Fed officials may believe that assuming annual productivity growth of 1%-1.5% and a 2%-2.5% inflation target, the ideal annual wage growth rate would be around 3.5%. Nick Timiraos quoted former Boston Fed Chair Eric Rosengren, who pointed out that the problem lies in the fact that in a hot labor market, American workers may not be willing to accept lower wage increases and may seek job changes. In addition, Karen Dynan, an economist at Harvard University, also told Timiraos that historically, investors' belief that inflation will quickly fall back based on individual signs is often wishful thinking. She explained that in 2021, when inflation began to rise sharply, some economists ignored strong underlying demand and believed it was a temporary phenomenon, but inflationary pressures never eased. Seth Carpenter, Chief Global Economist at Morgan Stanley, also pointed out that when inflation in certain categories of goods slows down and eases the pressure on disposable income, consumers will purchase other goods, which may further drive up inflation. In addition, some economists believe that the cooling US economy will push inflation to slow down, leading to an increase in real interest rates adjusted for inflation. Even if this week's rate hike is the last one in the current tightening cycle, it will still have an unnecessary negative impact on the economy. Jonathan Pingle, Chief US Economist at UBS, believes that there is ample evidence that the labor market is cooling down. For example, the time it takes for unemployed workers to find new jobs has been increasing, and the growth in working hours for private sector employees has slowed down in sync with the number of unfilled job positions. In the first half of this year, the monthly recruitment in the private sector decreased from 317,000 positions in the second half of 2022 and 436,000 positions in the first half of 2022 to an average of 215,000 positions. Pingle told Timiraos, "If the job market can steadily add 200,000 positions per month, then the Fed has reason to maintain high interest rates for a long time. However, if job growth continues to slow down and inflation cools down, pushing up real interest rates, it may cause unnecessary damage to the US economy."