‘More Restrictive’ Policy If inflation Fails To Come Down

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Federal Reserve officials in June emphasized the need to fight inflation even if it meant slowing an economy that already appears on the brink of a recession, according to meeting minutes released Wednesday.

“With four FOMC meetings left, we expect at least a 50bps interest rate hike in each meeting. This is based on the Fed’s latest projection on the fund’s rate which is expected to settle at 3.50~3.75% by year-end. If it were to reach that range, it is higher than 2019 and long-run neutral rate of 2.50%,” says MIDF.

In the latest minutes of meeting, the Fed remained committed to combat inflation even if GDP growth to record slower than initial projection, +1.7% vs. +2.8%.

Policy shift?

Headline inflation in the US to stay above the +5.0% level amid elevated global energy prices. However, mostly referred inflation rate by the Fed which is the core PCE price growth has decelerated since Mar-22. Core PCE inflation hit a 6-month low at +4.7%yoy in May-22, still above the +2.0% target rate.

“We believe the Fed will stay on course despite lower GDP growth unless inflationary pressure falls faster than expected.”

USA ISM Non-Manufacturing PMI

In June, a closely watched gauge of the US service sector fell to its lowest level in 20 months, but held up better than expected despite ongoing pressures from high labour and other input costs.

According to the Institute of Supply Management, the non-manufacturing purchasing managers index fell to 55.3 in June from 55.9 in May.

While this indicates that activity is slowing, it is still better than the consensus forecast of 54.3 ahead of schedule.

Non-manufacturing PMI in the US remained optimistic as the survey reading still above 50-points demarcation line.

Jobless rate in the US is at pandemic low of 3.6% in May-22, which we believe key fundamental support for domestic demand in the economy.

However, inflationary pressure and aggressive tightening monetary policy by the Fed are constraining the demand in 2QCY22 onwards.

“Moving forward, we expect optimism among businesses in the US to stay low amid continued pressures coming from inflation risk, monetary tightening, tight labour market and elevated energy prices,” the analyst firm says.

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