It is expected that the US Federal Reserve (Fed) will raise its policy rate by another 0.75 percent at the Federal Open Market Committee (FOMC) meeting slated for September 20-21, 2022 as the US headline inflation rate for August was still higher than what was expected by the markets although it fell for two consecutive months. Meanwhile, core inflation, excluding highly volatile food and energy prices, has begun to soar again, suggesting broad-based and increased inflationary pressures even as energy costs, particularly oil have declined. The latest data shows that the US labor market remains robust. Despite a slight increase in the August unemployment rate, non-farm payrolls were higher than expected by the markets, while the number of Americans filing new claims for unemployment benefits for the week ending July 10, 2022 fell to the lowest level in more than three months.
Looking ahead, it is expected that the Fed will continue to raise its policy rates until at least the end of 2022. However, the size of its rate hikes at the upcoming November and December meetings will primarily rest with inflation and other economic figures. If the US inflation eases in line with the slowing economy, the likelihood for a policy rate hike by another 0.75 percent looks slim. Instead, the Fed may increase its policy rates by only 0.25-0.50 percent at the remaining meetings during the final quarter of 2022. Nevertheless, if the US inflation, particularly core inflation has not eased, the Fed may need to continue its aggressive monetary policy at the remaining meetings of this year. At the upcoming FOMC meeting, the Fed will release its economic growth and inflation projections along with the revised Fed dot plot. These new economic figures will likely draw market attention as they reflect the Fed’s views towards the implementation of its monetary policy, going forward.