Two Federal Reserve dissenters, Neel Kashkari and Beth Hammack, explained why they pushed for a rate hike at this week's meeting instead of holding steady, pointing to elevated inflation risks. Fresh wage data beat forecasts the same week, but Treasury markets are signaling doubt that the Fed will raise rates again.
Neel Kashkari and Beth Hammack explained their dissents at the Federal Reserve's last meeting, arguing that inflation risks remain elevated and that a series of gradual policy moves would work better than waiting until larger hikes become necessary. Both dissented in favor of a 25 basis point rate hike. A third policymaker, Lorie Logan, also dissented and was expected to speak on the matter.
Kashkari points to new demand pressures
Kashkari's case centers on where the inflation is coming from. He said recent data center investment has added a new demand element to inflation, and that a series of supply shocks has been responsible for part of the problem.
He believes monetary policy has a role in addressing successive supply shocks that could let inflation become entrenched, even though policy can look through any single shock. If inflation durably fades, he argued, small steps would let the Fed slow or pause tightening without unnecessary damage.
If it stays elevated, he said, small moves now beat larger ones later.
Hammack wants the Fed to act now
Hammack's dissent is more direct. She believes the current policy rate is not restrictive enough and that the Fed should move now, arguing inflation has been too high for too long. She is not confident it will ease without additional action, and says the longer it stays elevated, the harder it will be to return to target.
With the labor market still stable, she wants the committee focused squarely on prices.
Wage growth reinforces the hawks' case
The Employment Cost Index climbed 0.9% quarter-over-quarter in the second quarter, the Bureau of Labor Statistics said, above the 0.8% forecast analysts had penciled in. Total compensation is now up 3.4% over the past twelve months, with wages rising 3.2% annually and benefits up 3.8%. When pay rises faster than productivity, businesses tend to pass the higher cost to consumers, a dynamic the Fed watches because it can feed directly into the inflation gauges it tracks.
Markets bet the Fed is done hiking
Bond markets are reading the situation differently. Treasury yields have diverged since the Fed left rates unchanged this week, with shorter maturities falling while the 30-year yield jumped to its highest level in 19 years, a steepening some investors read as doubt the Fed will raise rates again. Chair Kevin Warsh insisted policymakers "will not hesitate to act" if price pressures fail to ease. Yet 10-year yields have still climbed 25 basis points so far in July, the largest one-month rise since March.
Sources: Investinglive, Crypto Briefing, Reuters via Investing.com
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