Macro conditions are still too strong for the Federal Open Market Committee to stop its interest rate hikes. The headline 12-month inflation rate increased in August from 3.2% to 3.7%, according to the Consumer Price Index for August, though the more important core inflation (which excludes food and energy prices) showed a widely anticipated decline from 4.7% to 4.3%. Investors are generally taking this as a reassuring sign that the Fed is finished raising interest rates to fight inflation. In fact, the market-implied probability that the FOMC will raise rates again at next week’s meeting sank from 8% Tuesday to just 3% Wednesday, according to the CME FedWatch Tool. Given the strength of macro conditions, though, it’s way too early to feel reassured.
The Fed’s fight is not merely against inflation—it’s against inflationary pressures. Chair Jerome H. Powell could not have made that point more clearly than in his August 25 Jackson Hole Economic Symposium speech. It began with the strong statement, “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so,” and ended with the equally strong statement, “We will keep at it until the job is done.” Memo to investors: the Fed is not manipulating you—it is trying to give you the most direct information possible.
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