Source: Jin10 Data

In September 2021, after the inflation rate had exceeded the Federal Reserve's 2% target for three consecutive months, the Federal Reserve staff and policy makers changed their description of inflation to "persistently high." In the structure of the products, the operating income of 10-30 billion yuan products was respectively 401/1288/60 million yuan, and the year-on-year growth was 28.10%.

After the PCE price index used by the Federal Reserve to set inflation targets exceeded 4% in May, June, and July of the same year, the description of "persistently high" has been retained in the policy statements of the Federal Open Market Committee (FOMC), which is responsible for setting interest rates, even though the PCE price index has now fallen to 2.6% and seems to be continuing to decline.

The upcoming Federal Reserve policy meeting may ultimately remove the phrase from the policy statement. If so, this will be the strongest signal that the Federal Reserve plans to cut interest rates in September and begin its loose phase of monetary policy cycle, and investors are now assuming that a rate cut in September is almost certain.

Downgrading the description of inflation to milder words than "persistently high" may also lead to the Federal Reserve's modification of another key sentence in its current policy statement, that is, it will not cut interest rates until officials are "more confident that inflation will continue to move toward 2%."

After the PCE price index annual rate fell below 3% in January of this year, Federal Reserve staff stopped describing inflation as "persistently high." Policy makers pointed out before the meeting on July 30th and 31st that inflation was slowing throughout the economy, and they were more confident that this slowing will continue.

They began to use phrases like "getting closer" to describe how far away the policy change was and hinted at some possible changes that could lead the Federal Reserve to change its response to the economy and its policies.

Atlanta Fed Chairman Bostic said in late June that he would be "surprised" if any inflation data beyond 0.5% would be considered high, and indirectly pointed out that a benchmark of 2.5% or lower inflation rate is needed to consider changing the inflation description.

Many economists believe that this threshold will be reached or exceeded when PCE data for June is released on July 26th.

Richmond Fed President Barkin recently told reporters that the opening sentence of the policy statement, including the description of growth, job market and inflation, is used to "evaluate the economy." With the release of new PCE data before the meeting, "we will see what that number is and make the necessary adjustments."

Appropriate language guidance is important.

Some economists believe that the change is reasonable.

"They should more actively acknowledge that inflation has cooled," Neil Dutta, head of Renaissance Macro Research, said in a recent analysis, adding that the inflation issues that have troubled Federal Reserve officials now seem to be developing in their favor.

For example, the Bureau of Labor Statistics has developed a new inflation index for housing, which shows that rent has slowed meaningfully throughout the second quarter. This index can reflect housing inflation trends faster than CPI.

Dutta added: "Housing rent inflation is further slowing."

Recent Federal Reserve meeting records show that Federal Reserve staff have made changes to their description of inflation.

At the December meeting last year, as data showed an inflation rate of 3%, Federal Reserve staff said that inflation "eased somewhat over the past year but remained elevated."

But at the next month's meeting, with the annual rate of the PCE price index falling to 2.6% in December, the description of "persistently high" was modified in the report, and staff only said that inflation was still high above 2% after a sharp decline throughout the year.

The staff's comments on the economy usually do not attract much attention, because the Federal Reserve has a deep team of economists who are not the decision-makers, but their opinions can affect discussions, and changes in tone can provide signals on the direction of Federal Reserve policy.

As inflation accelerated in 2021, Federal Reserve staff and policy makers first acknowledged that inflation "had risen," a phrase used in Federal Reserve policy statements in April, June, and July of that year.

In February 2021, the annual rate of the PCE price index was only 1.8%, but it rose to 2.7% in March. When the Federal Reserve held a meeting in April that year, this data had not actually been released, but economists can estimate it closely based on other data.

In September 2021, the staff described inflation as "persistently high", and so was the policy statement.

The inflation of the Federal Reserve continued to rise, reaching a peak of 7.1% in June 2022. Thereafter, the inflation rate decreased sharply and slowed down more comprehensively.

Commodity prices have been declining, which is a reliable "drag" on inflation in the decade before the COVID-19 pandemic, and has at least been restored so far. Wages are declining, while "sticky" service prices are also declining.

New York Fed President Williams said in an interview last week that the United States is "getting closer and closer to the inflation trend we are looking for".

Omair Sharif, director of inflation insights and a keen observer of price trends, said the evidence seems clear. Sharif pointed out that excluding the seemingly noisy, rather than trend, high inflation in early 2024, the average core inflation rate in the past 13 months has reached the Federal Reserve's target of 2%. Sharif said:

"I've been looking at this issue from the summer of last year, when the core inflation rate, which excludes volatile food and energy prices, began to decline. In this context, removing references to persistently high inflation not only makes sense, but may be a good way to signal at the July meeting that a first rate cut in September may indeed be possible."

Editor/Lambor