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US Fed meets as key inflation measure holds steady
WASHINGTON, Aug 1, 2018 (BSS/AFP) – With one more US inflation report to
digest Tuesday, the Federal Reserve is expected to hold off on the next
interest rate increase for another six weeks.
The Fed opened a two-day policy meeting on Tuesday, and amid booming US
growth and signs prices are rising steadily, policymakers are expected to
continue to gradually raise the benchmark lending rates to keep the economy
on an even keel.
The Fed’s preferred price index held steady in June near a six-year high,
just above the Fed’s two-percent target, but energy and goods prices fell for
the month.
That will give the Fed comfort about its plans to continue to dial back
the stimulus in the economy this year. The central bank hopes to prevent the
economy from overheating amid the long-awaited return of inflation, falling
unemployment and vigorous GDP growth.
But that course is drawing stiff public rebukes from President Donald
Trump who has used Twitter and cable television to complain higher interest
rates undermines his economic growth agenda.
Observers warn that such public criticism could prompt the central bank to
raise rates more aggressively to prove to markets it remains independent of
political pressure, but for now it is expected to hike in September and
December.
– Inflation on target –
The Fed closely watches prices for consumers, and in particular the
Personal Consumption Expenditures price index, which rose 2.2 percent
compared to June of last year, the Commerce Department reported Tuesday.
That was the same annual inflation rate in May, which was revised down by
a tenth from a six-year high. But excluding the volatile food and fuel
categories, which see big swings from month to month, the “core” PCE held
steady at 1.9 percent for the third month in a row.
The Fed has made clear that it is comfortable with inflation a little
above or below its two percent target.
For the latest month, the PCE index rose 0.1 percent compared to the prior
month, a tenth of a point slower than May, as goods and energy prices both
fell 0.1 percent.
Meanwhile, consumer spending growth slowed for the second month in a row,
rising 0.4 percent, or $57.1 billion, in June. The biggest beneficiaries of
increased spending were restaurants and hotels.
The Commerce Department last week reported that the economy grew at a 4.1
percent clip in the second quarter, the fastest in almost four years, but
some of the increase is expected to be temporary which is unlikely to add
much pressure on the Fed to increase interest rates.
However, in a separate report Tuesday, the Labor Department said wage
increases gained pace for the third month in a row, rising 2.8 percent from
June of last year, while employee benefits rose 2.9 percent.
“The rate of acceleration is modest, but the upward trend is real, and
most policymakers won’t want to see numbers much in excess of 3 percent
unless they see real evidence of a sustainable pick-up in productivity
growth,” Ian Shepherdson of Pantheon Macroeconomics said in a note.
For now, he said, “the rate of increase in labor costs is no threat to
inflation.”
BSS/AFP/HR/1030