The Fed expected to stick with hawkish rate hikes, strategists say

The Federal Reserve is unlikely to budge from its hawkish rate hikes despite positive signs this week that U.S. inflation may be slowing, according to market strategists.

On Thursday, the producer price index surprisingly fell 0.5% in July from the previous month, compared with an estimate of a 0.2% increase, according to a Dow Jones survey. On an annual basis, the index rose 9.8%, the lowest rate since October 2021.

It followed encouraging data showing that consumer prices rose 8.5% in July. The rate was slightly cooler than the 8.7% that analysts had expected for the Dow Jones and a slowing pace from the previous month.

As both CPI and PPI soften, markets have started to moderate their expectations for Fed rate hikes. Still, the positive data doesn’t mean it’s “mission complete” for the Fed, said Ben Emons, managing director of global macro strategy at Medley Global Advisors.

“If you remove some of the headline noise, some of the… CPI, even PPI [numbers] Still show upward pressure,” he told CNBC’s “Squawk Box Asia” on Friday. “Fed can’t be done here. This probably means that the rate hike of 75 basis points remains on the table.”

“The pricing of Fed funds futures and euro-dollar futures shows that we’re still more in the direction of a 75 basis point rate hike. And I think that’s because of the guidance that all these Fed speakers are keeping on in giving us — “just don’t get complacent here, we’re going to keep going,” Emons added.

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Last week, St. Louis Federal Reserve President James Bullard that the central bank will continue to raise interest rates until it sees convincing evidence that inflation is falling.

That message is consistent with other Fed speakers, including regional presidents Loretta Mester of Cleveland, Charles Evans of Chicago and Mary Daly of San Francisco. They have all recently indicated that the inflation battle is far from over and that more monetary policy tightening will be needed.

‘Not enough evidence’

The Fed raised its benchmark interest rate by 0.75 percentage points in both June and July — the biggest back-to-back increases since the central bank began using the cash rate as its main monetary policy tool in the early 1990s.

Victoria Fernandez, chief market strategist at Crossmark Global Investments, said the Fed is nowhere close to putting the brakes on and scaling back rate hikes given the current data.

“To me, there’s not enough evidence that the Fed can make a big pivot from where they are. I still think they’re looking at 50, 75 basis points at the September meeting,” she told CNBC’s “Street Signs Asia” Friday.

“Nothing that comes out of the economic reports from the CPI or PPI in today’s session will change that at this point. I think we still have a significant way to go,” she added.

Investors will seek guidance from Fed Chairman Jerome Powell on what the Fed could do at its next meeting in September.

Inflation is still sticky

Fernandez stressed that the stickier parts of inflation, such as wage and rent pressures, remain high. They do not fall at the same rate as energy, oil and gasoline components, she said.

The inflation data in the next CPI report in September will be key for the markets, she added.

“If they show us that we actually have a plateau or start a downtrend, then I think the Fed might come back a little bit to 50 basis points,” she said. “If it doesn’t show that, or if it even goes a little bit higher based on some stickier components, then I think you’re back at 75 for the meet,” Fernandez said.

The Federal Open Market Committee does not meet in August, when it holds its annual symposium in Jackson Hole, Wyoming.

Powell could use this opportunity to update markets on the path forward toward monetary tightening, Medley Global Advisors’ Emons noted, adding that the Fed understands that price pressures are so “persistent and sticky that it can’t really back off.”

“Don’t underestimate Jackson Hole. Some people dismiss that — that it’s not the platform. But he could take the stage and should at least re-emphasize that the Fed is really on this mission to really get inflation down. It’s most important goal.”

— With reporting from CNBC’s Jeff Cox.

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