While investors all over the world are looking forward to another rate hike by the Federal Reserve, the Fed itself is waiting for the inflation to pick up. So, these two events are inextricably linked: the Fed will not raise the funds rate until the inflation accelerates and the unemployment falls.
The last issue raises no questions – the unemployment level is already at the record low of 4.4%, but the inflation issue is troublesome. The price growth is sluggish. Too low inflation rate dents consumer spending as thrifty buyers are hesitant to make any purchases, waiting for the prices to go lower. With weak consumer spending, the economy loses momentum and slows down. That’s why the low inflation is the question number one for the Federal Reserve. Many experts think that the funds rate is likely to remain unchanged until December at least. “I think we are going to get to a third rate hike this year, but it will be driven by the inflation data. There is a real desire on the part of the Fed to hit the pause button until the haze clears and they can see more clearly what is happening." Diane Swonk, chief economist at DS Economics, said.
Fed Chairperson Janet Yellen seemed a bit confused and less determined after the recent FOMC policy meeting. Nevertheless, she said that the inflation deceleration was temporary. Whether this statement will prove to be true, economists will learn after the inflation report is published.
