The FOMC minutes to be released this week gains the most attention. The Fed is expected to reveal a long journey ahead in the tightening cycle with cuts off the table. We would discount any discussion that may suggest wage growth has moderated, since the meeting occurred before labour cost data shows acceleration.

More than two weeks after the July FOMC gathering, traders and analysts are still debating whether Fed Chair Powell intended to send a dovish signal at his post-meeting press conference. The July FOMC minutes will likely reveal that he did not and that Fed officials were unanimous on not cutting rates anytime soon.

The unanimous vote to hike by 75 basis points was underpinned by a broad sense among members that the upside risk to inflation is material. There may be references suggesting that “several” officials were alarmed by broader inflation and pickup in momentum in the blowout June CPI print.

Some members may point out that wage growth appeared to have peaked. However, this view is likely outdated after ensuing employment cost data showed acceleration, and average hours earnings growth was thought to have peaked, which were revised up to show acceleration.

Despite the drop in gasoline prices from the mid-June peak, the University of Michigan long-term inflation expectations index inched up in early August. The move highlights that consumers see price increases broadening beyond gasoline which provides another reason for the Federal Reserve to continue aggressively hiking rates.

The preliminary August estimate for 5 to 10-year inflation expectations rose to 3.0% from 2.9% in July. The reading has remained within 2.9%-3.1% for the past 13 months. The increase occurred despite the drop in gas prices, suggesting advances elsewhere -- food, medications, etc. are affecting consumer spirits.

Other measures, including one from the New York Fed, showed consumer inflation expectations are falling amid lower gasoline prices. The New York Fed’s measure covers a shorter, three-year horizon, which may explain greater volatility and correlation to gasoline prices.

A softer-than-expected July CPI print was good news, but not enough for the Fed to step back from its fight against inflation. Data on wages and productivity pointed to significant underlying price pressure and inflation expectations ticked higher in early August. Making a definitive call on the September FOMC meeting will be tough, however, the latest evidence aligns with our view that a 75-basis-point hike should not be ruled out yet.

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Fullerton Markets Research Team
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