“We’ve been front-end loading these very large rate increases, and now we’re getting closer to where we need to be,” Fed Chair Jerome Powell told reporters.
What came next: Investors cheered Powell’s apparent pivot. The S&P 500 rallied, notching its best month since November 2020, and financial conditions eased. Mortgage rates fell below 5% for the first time since mid-April.
Now, Fed officials are trying to set the record straight. Not wanting markets to change course too sharply, reversing the effects of their hard work thus far, they’ve been talking tough again.
“We need to see really compelling evidence that inflation is moving down, and my view is that we haven’t seen that yet,” Mester said.
As the Fed tries to bring demand back down so it stops running up against limited supply — pushing up prices — it’s closely watching the labor market, which has remained strong.
The news poured cold water on the theory that the Fed would change its approach dramatically any time soon. The central bank actually wants to see some weakening in the job market. When there are too many open roles, wages rise quickly, which can make economy-wide inflation even worse.
“This isn’t the news the Fed wanted to hear, and this will likely cause it to push rates higher, faster,” said Robert Frick, corporate economist with Navy Federal Credit Union.
Coming up: The next big data release is the Consumer Price Index, which is used to track US inflation. Economists polled by Refinitiv expect to learn that prices rose 8.7% in the year to July, down slightly from June. But excluding volatile food and energy prices, inflation may have inched higher.
America’s strong dollar is hurting everyone else
The latest: The greenback is up more than 10% in 2022 compared to other top currencies — near its highest level in two decades — as investors worried about a global recession have rushed to scoop up dollars, which are considered a safe haven in turbulent times.
US travelers may be rejoicing that a night out in Rome that once cost $100 now costs about $80, but it’s a more complicated picture for multinational companies and foreign governments.
The dollar’s gain is already hurting some vulnerable economies.
“It’s been a challenging environment,” William Jackson, chief emerging markets economist at Capital Economics, told me.
Monday: Earnings from BioNTech, Palantir, Tyson Foods, Novavax, News Corp., Take-Two Interactive and SmileDirectClub
Tuesday: Earnings from Dine Brands, Hyatt, Spirit Airlines, Coinbase, Roblox and Wynn Resorts
Wednesday: US Consumer Price Index for July; Earnings from Disney, Fox Corporation, Wendy’s and Bumble
Thursday: OPEC monthly report; US Producer Price Index for July; Earnings from Utz Brands, Warby Parker and Wheels Up
Friday: UK GDP; University of Michigan consumer sentiment survey