In nearly three years of Fed monetary policy meeting statements, there has been a habitual modifier that the Fed uses to describe inflation - elevated.

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So, when did the Fed start using "elevated" to describe inflation? The answer can actually be traced back to the September 2021 interest rate meeting.

At that time, when the Fed's most favored inflation index, the PCE price index, continued to exceed 4% in May, June, and July of that year - equivalent to twice the Fed's 2% inflation target - it could no longer attribute the inflation problem to "transitory" Fed, and finally admitted that the then US inflation was already "elevated".

And the fact is that the numbers for US inflation have since been completely out of control, completely beyond the grasp of the Fed.

However, some insiders now predict that the Fed will likely make a profoundly impactful wording change at the monetary policy meeting at the end of this month: namely, completely removing or modifying the use of "elevated" to describe inflation.

And once this actually happens, there can be no doubt that it will also be the strongest signal of the Fed's plan to cut rates as early as September and begin its monetary easing cycle.

Currently, the pricing in the interest rate futures market shows that traders are almost 100% confident that the Fed will cut rates in September.

Some insiders also said that once the Fed begins to downgrade its description of inflation to milder rhetoric than "elevated," the Fed may also modify another key sentence in its current policy statement - that it would be inappropriate to lower the target range for the federal funds rate before it has greater confidence in moving sustainably toward 2% inflation.

Why are insiders speculating that the above wording will change?

One reason for insiders to speculate that the above wording may change is that since the PCE price index fell below 3%, Fed staff have stopped describing inflation as "elevated" in some documents since January; another reason is that inflation is currently slowing more broadly across the entire US economy, which is making Fed officials increasingly confident that the economic slowdown will continue.

Fed officials have recently begun using phrases like "gradually getting closer" to describe how far away policy changes are and hinting at possible inflection points that may require the Fed to change its description of the economy and its policy response to the economy.

And this Friday's release of the June PCE price index in the US is likely to be a catalyst for the Fed to make relevant rhetorical changes. Raphael Bostic, president of the Atlanta Fed, said in late June that "if inflation exceeded the target by 0.5 percentage points, I would be surprised," indirectly indicating that a inflation rate of 2.5% or lower would be a benchmark - at least worth considering a change in the description of inflation.

And many economists believe that the June PCE data to be released on July 26 may fall below this threshold. Economists surveyed by the media currently generally predict that the June PCE price index in the US will fall from 2.6% in the previous month to 2.4%, and the core PCE price index will also fall from 2.6% in the previous month to 2.5%.

Richmond Fed President Barkin also pointed out in an interview last week that the opening phrase of the Fed's monetary policy statement, including its description of growth, labor markets and inflation, is "used to evaluate the economy." With new PCE data released before the meeting, "we'll see what the numbers are and then make any appropriate adjustments."

Some insiders also believe that the Fed currently has sufficient reasons to make relevant rhetorical changes.

Neil Dutta, Head of Economic Research at Renaissance Macro Research, said, "They (Fed officials) should be more proactive in acknowledging that inflation has cooled." In a recent analysis report, he pointed out that the inflation problem that once troubled Fed officials now seems to be shifting in the direction they want.

For example, the US Bureau of Labor Statistics has developed a new housing inflation index that captures trends in housing inflation more quickly than the slow-changing method used for the benchmark CPI. This index has shown a "meaningful slowdown," with rents falling throughout the second quarter. On this, Dutta said that the inflation of housing rents is further slowing down.

Omair Sharif, Head of the Inflation Watch magazine, also pointed out that under the current circumstances, removing the description of inflation as "elevated" is not only reasonable, but also "probably a good way to signal that the first rate cut may come in September at the July meeting."

Editor/ping