Why the Fed Might not Be Done Raising Rates

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The futures market suggests that the Federal Reserve is likely to pause at its upcoming meeting as inflation moderates. However, some Fed officials caution that it is too early to declare victory. This uncertainty is dampening investor enthusiasm, as stocks initially rallied following a Consumer Price Index (CPI) report showing that price increases had moderated. Yet, a lackluster Treasuries auction later in the day reversed the gains in both stocks and bonds.

The good news is that inflation has fallen sharply in the past year, with the CPI data demonstrating drops in core goods prices and a easing in rent inflation. President Biden has seized on this positive economic outlook and claimed that it is evidence of a strong economy. Economists from Bank of America have also described the latest CPI figure as “encouraging” and expect another soft August print.

However, there are concerns about food and fuel prices, which remain unpredictable. The recent rise in crude oil and gasoline prices poses substantial upside risks to headline inflation in August. Mary Daly, president of the San Francisco Fed, has taken a hawkish tone and believes that rate increases should not be taken off the table just yet. Energy prices will be a critical data point to watch, as it may compel the Fed to conclude its rate hike campaign with one last “insurance” rate hike.

In other news, the Supreme Court has temporarily blocked Purdue Pharma’s settlement over the opioid epidemic, causing a delay in payments to those who have sued the Sackler family and Purdue. The Maui wildfire death toll has risen to at least 55, raising questions about the official response to the disaster. President Biden has referred to China as a “ticking time bomb” due to its economic problems, and he recently issued an executive order to restrict investments in key tech sectors in China. Additionally, California is set to allow driverless taxis in San Francisco, despite objections from city officials.

On the business front, Tapestry, the owner of Coach and Kate Spade, has announced its plans to acquire Capri, the company behind Michael Kors and Versace, for $8.5 billion. However, investors are skeptical, and Tapestry’s shares closed significantly lower. While Tapestry views the deal as “transformational” and expects cost savings, doubts remain about the amount of debt being taken on and the heavy dependence on the Michael Kors brand.

The luxury sector has experienced a surge in mergers and acquisitions, with Kering and LVMH making significant moves. China has lifted its ban on group travel to more countries, which is good news for the luxury industry as Chinese tourists were once the biggest spenders overseas.

Lastly, the summer’s “revenge spending” spree is being led by women, with Taylor Swift’s concert tour on track to top $1 billion in sales. This exuberant spending on entertainment and fun nights out is propping up the economy in surprising ways and generating significant economic activity. However, it remains to be seen how long this trend will last.

Overall, the Federal Reserve must navigate the dilemma of deciding whether to pause rate increases in light of moderating inflation or continue with their efforts to tame inflation. The economic outlook remains uncertain, with factors such as food and fuel prices and energy prices playing a crucial role. Meanwhile, various events in the Supreme Court, natural disasters, and the business world introduce additional complexity to the economic landscape.

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