WASHINGTON: Mounting inflation pressures and a strengthening economy look to be pushing the Federal Reserve (Fed) towards an interest rate hike on the eve of critical national elections, with traders on Wednesday piling into bets on a second straight policy tightening in late October.
A closely watched measure of US business activity, S&P Global’s flash US Composite PMI Output Index, jumped this month to its highest level since July 2021, S&P Global reported on Wednesday.
The survey’s measure of prices paid by businesses for inputs surged to a nearly four-year high.
Oil prices took a leg up on Wednesday, with Brent crude futures rising about 2% to US$101.09 a barrel, and diesel fuel fetched over US$6.50 a US gallon on average, as the US-Iran war continued to disrupt supply with little prospect for a near-term resolution. Diesel has particular potential to broaden price pressures, as it powers the equipment and trucks used to make and move goods throughout the economy.
The backdrop of rising inflationary risks and a strong economy means the Fed is likely to deliver more rate hikes, Fed governor Michael Barr said on Wednesday in what’s become a rare bit of “forward guidance” from a US central banker.
“Risks to achieving our inflation target have increased, while risks to the labour market have receded,” Barr told a Chicago Fed housing affordability conference. “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”
In a unanimous decision last week, policymakers raised the central bank’s key rate to the 3.75% to 4% range, and 16 of 18 of them signalled the Fed would probably need to deliver at least one more rate hike before the end of this year.
Chairman Kevin Warsh said the Fed was removing “a dose of accommodation” but declined to say if he felt more would be needed.
Barr’s remarks on Wednesday suggested he felt at least two more rate hikes will be required, though he did not say by when.
“In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction,” Barr said, referring to the quarter-percentage-point hike last week.
“We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that.”
US Treasury yields jumped after Wednesday’s data, with the benchmark 10-year yield rising back above 5% to its highest level since 2007.
Unusually weak demand for five-year treasury notes at Wednesday’s auction also helped send five-year note yields to their own 19-year high.
Short-term US interest rate futures contracts were pricing about a 70% chance of another rate hike at the meeting on Sunday and Monday, up from about 55% earlier in the day.
Days after that October Fed decision, President Donald Trump’s Republicans will be defending slim majorities in both houses of Congress in national elections set for Nov 3. Back-to-back rate hikes could underscore the affordability concerns that polls show are a top issue for voters and are undercutting Trump’s popularity.
Analysts said the inflation the Fed is addressing stems in large part from the administration’s policy decisions, including sharply higher tariffs and the war in Iran.
Affordability concerns for would-be homeowners are also in focus. The Mortgage Bankers Association reported on Wednesday that the average rate on a US 30-year fixed-rate mortgage rose to a more than two-year high of 7.12% last week.
Trump has laid into the Fed, though not Warsh personally, for what he calls a “political” decision to raise, not cut, rates.
He has sought to address inflation concerns with proposals, including ending the war in Iran after the elections, and banning exports of US diesel. — Reuters
