The American economy remains at the heart of the debates. US inflation is particularly the subject of heated debate within the Fed. The last meetings in July indeed reveal a split FED on the best approach to adopt to control inflationary pressure.
The trend of US inflation highlighted by the FED
At its last meeting, the FED raised concerns about the path of inflation. “US inflation is still well above the Fed’s 2% target”indicates the minutes of the meeting.
Admittedly, there was a 3.2% increase in the consumer price index in July. However, underlying price pressures continue to ease. Result: the FED is seriously questioning the need for further rate hikes.
The impact of rate hikes
The quarter-point increase in interest rates brings the federal funds rate to a level of 5.25 to 5.5%. It’s about highest rate in 22 years. Fed officials thus find themselves faced with a difficult decision:
- keep rates stable to support economic growth,
- increase them further to fight persistent US inflation.
Some advocate patience, pointing out that the US economy can tolerate a certain level of inflation without compromising its stability. Other members of the Fed, on the other hand, are arguing in favor of further rate hikes in order to bring US inflation back to target.
US inflation outlook according to the Fed
Despite ongoing debates, the FED seems to be signaling a change in tone in its monetary policy. Officials are expressing growing wariness of another interest rate hike. “The risk of excessively tightening monetary policy is now balanced”they argue.
As the US economy continues to show signs of strength, the Fed is faced with difficult choices to balance growth and controlling US inflation. The fact is that its current decisions will have consequences for the financial markets and the economy in general. To be continued…
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