By Qudsia Bano

The US Federal Reserve has kept the possibility of a September interest-rate increase firmly on the policy table as persistent underlying price pressures remain a concern, making upcoming inflation data crucial to the central bank’s next move.

Federal Reserve Chairman Kevin Warsh used his August 28 Jackson Hole address to reinforce the central bank’s commitment to its 2% inflation target, arguing that recent improvement was not yet sufficient to declare the inflation fight over. The Fed’s benchmark federal funds rate currently stands at 3.5% to 3.75%.

The debate assumes greater significance ahead of the Federal Open Market Committee’s September 15-16 meeting, particularly after divisions over the appropriate policy stance emerged at its previous meeting.

At the July 28-29 meeting, three policymakers — Beth Hammack, Neel Kashkari and Lorie Logan — voted for a 25-basis-point increase rather than another hold.

Minutes of that meeting also showed that market pricing at the time had fully incorporated a 25-basis-point increase by September, although subsequent softer inflation readings complicated the outlook.

The inflation picture nevertheless remains uncomfortable for policymakers. The Personal Consumption Expenditures (PCE) price index increased 3.7% year-on-year in July, while core PCE inflation, excluding food and energy, stood at 3.3%, leaving both measures above the Fed’s 2% objective.

Recent shorter-term trends have provided somewhat more encouraging signals. Fed Governor Christopher Waller said on September 3 that three-month core inflation had declined steadily from 4.76% in February to 3.05% through July, although the latter rate was still inconsistent with the Fed’s target.

The US economy has meanwhile remained resilient enough to allow policymakers to continue focusing on inflation. Waller said economic activity and the labour market remained in good shape, reducing pressure on the Fed to respond to economic weakness.

The latest labour-market report has reinforced that assessment. US nonfarm payroll employment increased by 162,000 in August, while unemployment remained at 4.1%, according to the Bureau of Labor Statistics.

Waller sharpened the September debate by making clear that his decision would depend heavily on the next inflation reading.

He said he would be inclined to support keeping rates unchanged if recent disinflation continued, but an increase could become appropriate if the August data showed that the improvement had been temporary.

“If inflation comes in hot, I would consider a rate hike,” Waller said, adding that it might not take much acceleration in inflation to push him towards supporting tighter monetary policy.

The remarks underline the importance of the inflation data due immediately before the September meeting, which could determine whether policymakers extend the current pause or tighten monetary policy further.

Speaking earlier to Wealth Pakistan, Waqas Ghani, Head of Research at JS Global, described September as a “toss-up”, arguing that the decision would depend on whether subsequent inflation data confirmed that price pressures were continuing to cool.

That assessment has gained greater relevance as the September meeting approaches. While recent signs of disinflation have prevented a rate increase from becoming a foregone conclusion, inflation remains substantially above target and the labour market has yet to show the kind of weakness that would force policymakers towards easing.

Muntaha Sami, Investment Officer at Next Capital Limited, told Wealth Pakistan that the implications of another Fed increase would extend well beyond the United States.

She said the key issue was whether another rate hike would push US Treasury yields and the dollar higher, tightening global financial conditions and reducing investor appetite for risk assets, particularly in emerging markets.

Higher US interest rates can make dollar-denominated assets more attractive and increase the financing costs faced by emerging economies and companies seeking funds in international markets.

For global investors, Sami said, the September meeting had therefore become an important test of the Fed’s inflation-fighting resolve.

A hotter-than-expected August inflation report would strengthen the case for another increase, while continued disinflation could allow policymakers to extend the pause, she said.

Waller similarly indicated that August inflation would carry substantial weight in his decision. He said employment remained near its maximum sustainable level while inflation was making slow progress towards the 2% objective, leaving incoming price data as a critical factor ahead of the meeting.

The Fed’s latest Beige Book, released on September 2, also showed that US economic activity had increased modestly since early July, with 10 of the 12 Federal Reserve districts reporting slight to moderate growth, while price pressures varied across regions.

With inflation still above target, economic activity continuing to expand and the labour market remaining relatively stable, the coming inflation readings are set to play a decisive role in determining whether the Fed holds rates steady for another meeting or resumes monetary tightening.

Credit: INP-WealthPk