The minutes of the FOMC meeting around its July 26 meeting will be released on Wednesday, and are expected to continue to show hawkish sentiment as the Fed cautions against signaling an impending halt in US interest rates, as markets fully embrace the story of a soft fall.
The minutes were preceded by an appearance by Minneapolis Federal Reserve Chairman Neil Kashkari on Tuesday. His last comments a month ago made clear that entrenched inflation could push the Fed to raise rates further.
Kashkari said on Tuesday evening that while the U.S. central bank had made some progress in its fight against inflation, interest rates may still need to rise to finish the job.
Kashkari told the Abe Group’s Global Observers Conference in Minneapolis: “I’m not ready to say we’re done.”
But with signs of slowing inflation in recent months, he said: “I see positive signs saying, ‘Hey, we might be on our way; we can take more time to get more data and before we decide if we need to do more.'”
Read: The Federal Reserve raises interest rates to the highest level since 2001
The Federal Reserve raised its benchmark interest rate target of 5.25 percentage points since March 2022 to fight the fastest inflation in 40 years, including raising the interest rate by a quarter of a percentage point last month to a range of 5.25 percent to 5.00 percent.
Annual inflation, according to the Federal Reserve’s preferred measure, the Personal Consumption Expenditure Price Index, fell from last summer’s peak of 7 percent to 3 percent in June.
However, Kashkari noted that core inflation, excluding volatile energy and food prices, is still more than double the Fed’s 2 percent target, and needs “convincing” evidence that it is falling further to feel confident that the Fed has done enough.
At the same time, he added that the Fed has a “long way to go” to cut interest rates, although cutting them next year is a possibility if inflation continues to fall, “just to keep monetary policy at a stable point, not to continue to tighten.”
He said the labor market is too tight, and with economic growth continuing to exceed expectations, there is no sign that a recession is just around the corner.
Retail sales beat expectations
Kashkari’s comments came after U.S. retail sales came in more than expected in July, signaling continued economic expansion and keeping the possibility of a recession unlikely, but at the same time could result in a shrinking of widespread expectations that the Federal Reserve has already ended its tightening cycle.
The Commerce Department announced Tuesday evening that retail sales increased 0.7 percent last month. Economists polled by Reuters had expected retail sales to rise just 0.4 percent.
Retail sales were clearly boosted by Amazon’s popular offering, Amazon Prime Day, last month.
Prime Day has been a huge money maker for online retailers, with this year’s summer event grossing $12.7 billion over just two days on July 11 and 12. Last year, the company made $11.9 billion from the event.
Demand remained strong despite the Federal Reserve raising interest rates sharply to curb inflation. After the data is published, observers are likely to head for further monetary tightening during the rest of the year, most likely next month.
Basic retail sales closely correspond to the consumer spending component of GDP.
Consumer spending accounts for more than two-thirds of the U.S. economy. Although consumer spending in the second quarter slowed from its strong pace in the first quarter, the increase was enough to help steer the economy to an annual growth rate of 2.4 percent in the April-June period.
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