Fed may not be able to afford another July hike

Fed may not be able to afford another July hike

The Federal Reserve may not take its foot off the brakes as it tries to cool the U.S. economy and tame rising costs in July, but the rapid pace of inflation slowed for the first time in months.

The Labor Department reported on Wednesday that the consumer price index, a measure of the price for everyday goods, including gasoline, groceries and rents, rose 8.5% in July from a year ago, below the 9.1% year-over-year surge in June. Prices were unchanged in the one month period from June.

The core measure, which strips out food and energy, increased by 0.2% in July and 5.9% from the previous year, a marked slowdown from June.

While the Fed tries to wrestle inflation under control, consumer prices remain at a painful, multi-decade high. The Labor Department reported last week that 528,000 jobs were added in July, nearly double the estimate from economists who said the economy is still red-hot.

Joe Brusuelas, RSM chief economist, said this data will not affect the path of monetary policy out of the Federal ReserveFederal Reserve. We expect a 75 basis point hike at the September meeting due to the hot labor market and the widening out of inflation into the housing sector, which is now a large part of the policy challenge. In recent days, Fed policymakers have signaled that they are inclined to approve another mega-sized interest rate hike of 50 or 75 basis points when they meet at the end of September. There will be a round of inflation and jobs data before the meeting on September 20 -- 21.

I still think 50 basis points is the case, but I am open to 75 if the data evolves differently, San Francisco Fed President Mary Daly told Bloomberg TV on Thursday. She said that while the July figures are significant, they are not victory. She said it behooves us to stay data dependent and not call it.

According to the FedWatch tool, traders are divided over how big the Fed may go in September, with 55% pricing in a chance of a 50 basis point increase and 45% putting their money on a 75 basis point hike in the fall.

In July, policymakers approved the second straight 75 basis-point hike and hinted in their post-meeting statement that additional increases are likely to occur in the coming months, as they remain committed to returning inflation to its 2% objective. Chairman said during his post-meeting press conference that another 75 basis-point hike could be appropriate in the future, but that it ultimately depends on the upcoming economic data.

We're going to look at the data and the evolving outlook very carefully and make a decision in September about what we're going to do, Powell said. I'm not really going to give any guidance about what that might be. We might do another unusually large rate increase, but that's not a decision we've made at all.