On Wednesday (November 29th) local time, the two regional Fed presidents expressed different views on the path of US inflation.
Atlanta Fed President Bostic wrote in an article on the official website that he increasingly believes that inflation is firmly on a downward path; while Richmond Fed President Barkin emphasized that the central bank should retain options for further rate hikes in case inflation proves to be more stubborn than expected.
Bostic stated that both CPI and PCE, two major inflation indicators, show that the rate of price increases in the United States has slowed significantly to half of what it was in the summer of 2022 over the past 15 months. He admitted that the road to reaching 2% is bumpy, “but we will eventually get there.”
Bostic revealed that in recent weeks, there has been no change in information feedback from this regional central bank’s “Regional Economic Information Network” (REIN), namely “increasing evidence suggests that tight monetary policy is having an increasing impact on economic activity.”
From farmers postponing purchases of high-tech tractors to builders offering incentives to attract homebuyers who are concerned about rising mortgage rates, tightening financial conditions seem to be increasingly suppressing economic activity.
Bostic pointed out that he and his staff have also noticed a clear signal – weakening pricing power among businesses, which means raising prices for goods is no longer easy. At the same time, they have also heard reports of companies sacrificing some profit margins in order to maintain market share.
He emphasized that pricing power among US business and consumer service providers is also weakening. “This is important because price increases for services tend to be more persistent than those for goods.”
“Many companies in Southeastern states have told our staff members that their annual wage growth rates will return to levels between 2% and 3%, lower than the previous three years’ range of 3% to 5%.”
As one of the most dovish officials in the Federal Reserve after Gulsby, Bostic’s view on inflation is not particularly surprising to the market. According to FOMC rules, Bostic will become a voting member for monetary policy rotation in 2024, while another hawkish voting member next year, Barkin, maintains a more cautious attitude.
Barkin told the media that he does not have a predetermined policy path given the current high level of uncertainty. “If inflation naturally and steadily declines, that would be great and there wouldn’t be a particular need for new measures on interest rates. But if inflation picks up again, I think we should have options to take further action.”
Barkin emphasized that no one can accurately pinpoint the level of interest rates needed to address inflation. Therefore, the central bank will continuously adjust its policies as it gains a better understanding of economic conditions. He also mentioned that persistent price pressures in housing and services are reasons why caution needs to be maintained by the central bank.
Before Thursday’s US stock market opening bell, the US Department of Labor will release October personal consumption expenditure reports. The market expects PCE price index annual rate to decrease from 3.4% to 3.0%, while core PCE price index annual rate is expected to drop from 3.7% to 3.5%.
Yesterday, Bill Ackman, a well-known Wall Street investor and founder of Pershing Square Capital Management LP., betted that the Fed may start cutting interest rates as early as Q1 next year.Ackman stated that with an inflation trend below 3%, maintaining Fed rates at around 5.5% would result in “a very high real interest rate.”