The U.S. Federal Reserve raised rates another 75 basis points in an attempt to curb red-hot inflation, and indicated more rate hikes to come. Anthony Okolie speaks with James Marple, Senior Economist, TD Bank, about the implications for the U.S. economy.
The Federal Reserve hiked interest rates 75 basis points for a second straight meeting. And they've also indicated that there will be more to come. James, what got your attention today?
Sure, well, there was precious little different in this statement relative to the last one. Of course, the last one they raised by 75 when the market was anticipating 50. This time the 75 was fully anticipated. Their comments on the economy reflected what we're all seeing in the data, that there has been a bit of a slowdown apparent in economic activity in both spending and production. But the labor market is still very tight. The unemployment rate is still close to a 50-year low. And they continue to see very, very robust job growth. So that was reflected in the statement. They did continue to mention, obviously, inflation being elevated, the impact of the war in Ukraine. They did take out reference to the COVID lockdowns in China. So maybe a little bit of a silver lining in terms of they're looking at some of the factors behind the inflation. But obviously very much focused on inflation, even if that means slowing economic activity further.
OK, I want to touch on the press conference afterwards, because certainly the Fed Chair said during the press conference that the impact of past rate hikes haven't been fully felt by the economy. How have bond markets reacted to that commentary?
Yeah, well, that was interesting because I think initially we had seen anticipation that there could be more rate hikes to the same degree, another 75 basis points. And that was at least a reflection that maybe the Fed is now more so in wait and see mode. And he echoed that with other comments saying they're really going to be watching over the next eight-week period how the economic data comes in. Obviously, we'll have two more inflation reports. We'll have two more labor market reports, really indicating that they are very much in data dependent mode. They did still say that they anticipated that further rate hikes would be necessary, but obviously, that's going to be very contingent on how the economy evolves. And just recognizing that they've gone quite fast raising rates, historically fast, and they've brought the level of interest rates now to a place where they think they're broadly in line with their neutral rate that is neither supportive or not supportive of growth. So I think it means they could go a little slower and will be much more responsive to how the data is responding to their rate hikes to date.
And you talked about things that they'll be watching closely. What do you think the Fed will be looking at closely that would lead them to change course on monetary policy going forward?
Sure, well, as we've seen, inflation is really the number one indicator. And when they went the whole 75 basis points in June rather than 50, that was because inflation came in, again, stronger than anticipated. That was less of a factor with the last inflation report. They should start to see some signs that the headline inflation rate, at least, is starting to slow. I mean, we've certainly seen that in commodity prices, which are real time. That will show up in the next month's inflation report. But I think they'll be watching that, as well as really indicators in the labor market. I mean, we've seen continued robust job growth. The labor market still very tight. If they are starting to see signs that that's changing negatively, that may slow their hand as well.
And I want to talk about inflation because you did mention that commodity prices have come down. And we actually have seen some signs of that. My question to you is, have we seen peak inflation? And if so, what does that mean for Fed policy going forward?
Sure, well, I think on the headline inflation rate, there is a good chance that we've seen the highest, just because of how much, especially energy has been contributing to it. I mean, the gap between core and headline food and energy prices have really been extraordinarily fast in terms of their rate of growth. And that will-- should reverse at least in the next month report. But I mean, beyond the peak in the headline rate, I think the core rate may not have peaked, or at least will stay relatively elevated, and that's because it has service indicators that tend to be more persistent, especially rent. And that has not caught up to market indicators of how high rent growth has been. It typically lags. So I think even beyond the P question, inflation will remain elevated. It is definitely going to take quite a while before it comes down to anywhere near the 2% target. And that means that the Fed is going to have to continue to be vigilant in terms of raising interest rates.
So certainly aggressive monetary policy still going forward for the Fed.
I want to talk a little bit about the US dollar. As you know, it's surged to 20-year highs against a basket of currencies and continues to remain at elevated levels. What do you see the US dollar going over the next little while?
I think against at least the Canadian loonie that we would see-- we could see a little more strength in the Canadian dollar. I think we've seen that as aggressive as the Fed has been, the Bank of Canada has been equally aggressive. I mean, we will have to see, again, it will perhaps come down to which economy is slowing more quickly. And at the current juncture, it looks like beyond the Canadian housing market, where we've clearly seen signs of slowing, the Canadian economy could be holding up a bit better. Obviously, we have the commodity boost, which is really a strong income gain, especially for those energy producing parts of the country. So that should help in the near term. I think maybe give a little bit of a lift to the loonie. Versus the euro, I mean, there's just a lot of worry I think still about ongoing shortages of natural gas. And we see an ECB that is less aggressive, relative to the Fed. So I don't think there'll be much reversal there. But against a broad range of currencies, I mean, the dollar's just been so strong that it would make sense to me to see a little bit of a back up there.
James, thank you very much for your insights and thanks for joining us.
You're welcome. Good to be here.