The inflation situation in the United States is one of the most critical factors determining the monetary policy of the Federal Reserve, and it is also an important basis for political voting among millions of American voters. On Tuesday, US Treasury Secretary Yellen once again sent a positive signal, stating that she believes inflation will continue to decline over time.
Yellen stated in the hearing of the House Financial Services Committee that rent and housing costs are the main reasons for higher than expected inflation in the United States, but these disturbances will gradually disappear. In addition, the causes of inflation, including supply issues and labor market tensions, have been alleviated, which will help to continue to alleviate consumer price pressures.
White House National Economic Committee Chairman Lael Brainard subsequently praised the Biden administration for making encouraging progress in reducing inflation, and they will continue to work hard to further reduce the cost of living for working families in the United States.
In May, the core PCE index in the United States increased by 2.6% year-on-year, approaching the Federal Reserve's inflation target of 2%. Brainard said this marks significant progress. This Thursday, the United States will release its core CPI data for June, and analysts now expect a year-on-year increase of 3.4%, unchanged from last month.
The weak inflation figures are favorable for the Federal Reserve to make interest rate cuts, which is also a scene that many investors are eager to see. On the other hand, Yellen and the White House's "self affirmation" did not provide enough security to the market, one important reason being the threat of the Trump 2.0 era.
Given that the United States will hold a presidential election in November this year, many traders believe that this will be a major event determining the inflation situation in the United States for the next three to four years. Therefore, all of Yellen's promises now seem endless to Wall Street.
Contradictory views
Many investors and traders are indeed optimistic about the June inflation data released on Thursday, but some warn that a brief lull does not mean the risk has dissipated. The discussion about how US inflation will move in the coming months and years is becoming increasingly intense, which also makes the outlook for the Federal Reserve's monetary policy more uncertain.
One view suggests that as the US economy slows down, inflation will also continue to slow down, which could lead to the Federal Reserve starting interest rate cuts in September. Holders of such views expect the US inflation rate to drop to the target level of 2% by May 2025.
But people from the other camp believe that if Trump takes office in the White House, with his trade and immigration policies, inflation in the United States will inevitably rise again. According to Thierry Wizman, a global forex and interest rate strategist at Macquarie, a financial services group based in New York, some traders believe that US interest rates will become higher under the Trump 2.0 policy.
Last week, Goldman Sachs Chief Economist Jan Hatzius estimated that considering Trump's 10% tariff proposal could trigger retaliation from other countries, it would ultimately lead to a 1.1 percentage point increase in US inflation and result in the Federal Reserve conducting five more 25 basis point rate hikes each time.
Kong Hu, an inflation trader at WinShore Capital Partners, predicts pessimistically that although the market expects the Federal Reserve to cut interest rates in September, he believes it is unlikely that the Fed will cut rates in 2024. Although inflation data is important, the election results may change everything, which forces the Federal Reserve to act cautiously.
Economist Derek Tang from Monetary Policy Analytics also believes that the Federal Reserve will not take any action in the midst of widespread discussions about Trump's policies. They will only say that post pandemic economic forecasts are always full of uncertainty.