- ING Regional Head of Research for the Americas Padhraic Garvey:
- 'We think the Fed will look through the energy-related near-term inflation and choose to hold interest rates steady'
- American Enterprise Institute Senior Fellow Steven Kamin:
- 'With labor market data coming in strong and the headline rate very elevated, I don't see Fed cuts as likely'
- Moody's Analytics Chief Economist Mark Zandi: ' With this uncomfortably high inflation, there is no prospect of the Fed easing interest rates any time soon'
With inflation in the US surging at its fastest pace in three years driven by rising energy costs, while the labor market remains resilient, the messages to be delivered by new Fed Chairman Kevin Warsh at next week's monetary policy meeting are highly anticipated.
Recent data released in the US showed that Warsh took office in an economic environment where inflation rose yet employment maintained its strength.
The surge in oil prices due to the impact of the US-Israel-Iran war caused inflation in the country to top 4% for the first time in three years.
This scenario created a challenging balancing act for Warsh, forcing him to navigate between pressure from the White House for an interest rate cut and the possibility of tighter monetary policy brought to the fore by rising inflation.
The messages from Warsh, who will chair a Fed Open Market Committee (FOMC) meeting for the first time next Tuesday and Wednesday, will be closely watched by financial markets.
Rising energy costs fuel inflation
The Consumer Price Index (CPI) and Producer Price Index (PPI) this week intensified concerns about inflation in the country.
CPI rose 0.5% on a monthly basis and 4.2% on an annual basis in May, in line with market expectations, with its highest annual increase since April 2023.
The data, arriving just before next week’s Fed meeting, showed that annual inflation rose to nearly twice the bank's 2% target.
The energy index accounted for more than 60% of the monthly increase in inflation in May; energy costs surged 3.9% monthly and 23.5% annually during the period in question.
Economists said spending related to AI and tariffs also put upward pressure on prices.
PPI exceeded expectations in May, climbing 1.1% on a monthly basis and 6.5% on an annual basis, with its highest annual increase since November 2022.
Labor market still resilient
The inflation data followed employment figures, another critical indicator closely monitored by the Fed.
Data released in the US on June 5 said nonfarm payrolls rose 172,000 in May, exceeding expectations.
The unemployment rate remained stable at 4.3%, in line with expectations.
Nonfarm payrolls data for previous months were also revised upward, indicating that the labor market maintained its resilience.
Inflation set to stay above 4% through much of second half of year
Padhraic Garvey, ING’s regional head of research for the Americas, told Anadolu that oil price forecasts, building on price pressure tied to tariffs and the tech roll-out, mean that inflation will likely stay above 4% through much of the second half of the year.
"Given the resilience of the economy, we are now in a situation where financial markets are fully pricing a 25 basis points Fed rate hike this year with a 70% chance of a second hike in 2027," he said.
"It is a close call, but while sounding hawkish, we think the Fed will 'look through' the energy-related near-term inflation and choose to hold interest rates steady at a level that a majority of officials still believe is mildly restrictive," Garvey added.
Saying the US economy currently lacks the consumer demand impetus that would prompt a return of the broad and persistent inflation seen in 2022, Garvey argued that favorable factors are expected to emerge in the second half of the year that will help to mitigate any energy-related spillover effects into core inflation.
He said that crucially, both financial market and consumer inflation expectations remain within tolerable ranges.
While supply and demand rebalancing will take time, he said, they see greater scope for energy price falls in 2027 that will pull inflation lower.
"With core inflation looking more benign, there is the prospect that inflation falls back below 2%, giving the Fed room to resume moving policy rates back to neutral next year, although our conviction on the need for any interest rate cuts has receded," Garvey said.
Data shows energy price hike has not fed into broader categories
Steven Kamin, a senior fellow at the American Enterprise Institute, said that while the 12-month headline number was quite high, the core monthly number actually declined to 0.2%, in the neighborhood of the Fed's target.
Saying that this suggests that energy price hikes have not fed into broader price categories, Kamin added that core goods prices have continued to be flat, suggesting that most of the effect of higher tariffs is over.
"Nevertheless, with labor market data coming in strong and the headline rate very elevated, I don't see Fed cuts as likely," he said.
"I'm thinking the Fed will stay on hold for several meetings, and maybe all the way through the end of the year," Kamin added.
No chance of rate cuts
Moody's Analytics Chief Economist Mark Zandi said the big increases in May CPI and PPI suggest that inflation, as measured by the consumer expenditure deflator, will be near 4% year-on-year, double the Fed’s 2% inflation target.
"With this uncomfortably high inflation, there is no prospect of the Fed easing interest rates anytime soon," he said.
Arguing that no change in monetary policy this year is thus the most likely scenario, Zandi added that if inflation expectations continue to rise, the next move by the Fed will be to hike rates.
"The Fed’s primary focus is getting inflation back down, and will sacrifice the economy if need be to achieve this in a timely way," he added.
