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Inflation

• Fed has tightened policy significantly over the past year, which has helped inflation to move down from its peak.

• Core PCE inflation, the Fed’s key inflation measure, has gradually receded to 4.3% YoY as of July 2023, down from its peak of 5.4% YoY in February 2022.

• Fed’s inflation objective remained unchanged at 2%.

• Fed Highlighted the welcome declines in goods inflation and a probable decline in shelter inflation, but also emphasized that non-housing core services inflation has been less responsive to either changes in the economy or to Fed tightening.

US Inflation (YoY Growth)

Growth

• Wage growth across a range of measures continues to slow. Even as nominal wage growth has slowed, real wage growth has been increasing as inflation has fallen.

• The US economy accelerated to a 2.4% annual growth rate between April and June this year, helped partly by consumer spending and some forms of investment.

• Fed chair Jerome Powell noted that the GDP growth has come in above Fed’s expectations and the persistently above-trend growth could put further progress on inflation at risk

Interest rate outlook

• The monetary policy is now in the restrictive territory, putting downward pressure on economic activity, hiring, and inflation.

• Although inflation moved down from its peak, its still above the 2% target.

• Fed will proceed “carefully” in the upcoming meeting as they assess the incoming data and the evolving outlook and risks.

• “Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response”.

• The Federal Reserve highlighted its commitment to take the necessary actions to ensure price stability. This suggests the possibility of another policy rate hike remains an option.

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