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Fed’s Mester backs another 75 basis point rate hike in July

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Yahoo Finance Live anchors discuss Cleveland Fed President Loretta Mester’s inflation expectations, which include taking on another 75 basis point rate hike in July.

Video Transcript

- Another 75 basis point rate hike question mark? That's what Cleveland Fed President Loretta Mester is saying should happen at the next Fed meeting in July. Speaking at the European Central bank's annual forum today, you know him and your hood is the ECB Mester. She went on to say that the July meeting will likely see a debate among FOMC policymakers on a 50 or 75 basis point rate hike.

Joining us now to talk more about these comments as well as the upcoming July meeting is the man with the best smile here, well--

BRIAN CHEUNG: Oh, stop it.

- Wow.

- Oh my gosh.

- Don't pump him up anymore.

- OK. So Brian, what are we expecting to hear not just from Jay Powell today but kind of pairing that together with what Mester's already said?

BRIAN CHEUNG: Yeah, Fed Chair Jay Powell speaking at the ECB actually in a panel that just kicked off a few minutes ago. We'll see what he says. He hasn't spoken quite yet but a lot of the kind of basis for what we're expecting to hear from Fed officials is built around some of the commentary we've already gotten. And Cleveland Fed President Loretta Mester already hitting the tape with a public call for another 75 basis point hike in the Fed's next meeting that will be happening in about four weeks.

Now, what's very interesting is that we know that the Fed Chair had teed up when they made the announcement of the 75 basis point hike two weeks ago that the next meeting was going to be a debate between either 50 or 75. So it's very binary right now. No 100 basis point hike on the table for now but we'll see what the Fed officials have to say.

But the debate between 50 and 75 might really depend on how much you see the supply chain issue weighing on the high inflation that we're seeing now. And obviously, PCE, the read that we'll get tomorrow morning will be a big another data point that the Fed will have in its Belt. But Loretta Mester saying, look right now, she wants to look through the supply shocks right now and just try to get inflation expectations down in September remarks that she made.

I want to read to what you said. She said, "it also calls into question the conventional view that monetary policy should always look through supply shocks. In some circumstances, such shocks could threaten the ability of stability of inflation expectations and would require policy action." Now that's a pretty boring quote but I actually think that's pretty noticeable because it's essentially a Fed official saying the supply chain story is not that relevant right now. We need to make sure we let Americans know that we're getting ahead of inflation expectations. That's why we got to get more aggressive.

- So I'm looking at some of the early headlines coming from this panel that's being held. And Agustin Carstens is there, he is the head of the Bank of International Settlements if I'm not mistaken.

BRIAN CHEUNG: Yeah.

- And he says there's an important change that's taken place with regard to inflation versus the 1970s. He says Central Banks are in a much better position today. And it's interesting if they're in a better position because they're being faced obviously with some pretty steep challenges. We saw, for example, Spanish inflation, numbers out today, CPI of 10.2%. German inflation up some 7.6%. So like, it feels like these guys have their work cut out for them.

BRIAN CHEUNG: Oh, absolutely. And I think that when we talk about the story that's happening here in the United States with high inflation, concerns about Central Bank hiking perhaps, throwing at least temporarily those regions into a stagflation or environment where are you going to have high inflation, but low growth. I mean, that's a story that's very much actually more relevant to Europe than it is here in the United States when you consider that the high inflation that they're experiencing in the eurozone is arguably more persistent because they're more exposed to the Russia-Ukraine issue than the United States is, right. I mean, what's happening in Eastern Europe is going to have more of a direct impact on what the ECB is trying to do than it is on what the Fed is trying to do.

But what's very interesting is that you have Fed Chairman Jay Powell traveling to Portugal to speak at this ECB panel. You have to remember that even though the Fed is only tasked with being concerned about what's happening here in the US economy, what's happening in Europe is going to be very relevant. And I feel like a little bit under-covered here is the idea that if there is a massive slowdown that happens in Europe that precedes a recession in the United States, that could spill back over into the United States and make it even tougher for the Fed to try to engineer this soft landing if one of that major storylines out of a huge contribution to global GDP, which is the entire eurozone ends up falling into recession very fast. You already see spreads bowling out. Christine Lagarde has a very tough task ahead of her.

- Yeah. That's a really good point about the interconnectedness still of the global economy, especially between the US and Europe. Finally, I just quickly want to ask you about the GDP number this morning and that final revision showing a downward revision, downward revision in personal consumption, which-- and I we kind of like put that number to the side when it first came out. How should we think be thinking about that number?

BRIAN CHEUNG: Well, I think we should be thinking about within the context of whether or not that's going to spell a trend for the future inflation readings that we're going to get. I mean, very important to note that what we're talking about here with the revisions to Q1 GDP is backwards looking. In fact, it's not looking at April or May, it's looking at the first quarter ended March 31, right.

So if there is a downward revision on personal consumption expenditures, which, by the way, is just a measure of inflation, maybe that tells you OK, well possibly heading into the second quarter, which we won't get the first reading of until the end of July. I believe it's actually the day after the Fed meeting. So buckle up for that one. But really, what that might tell you is perhaps we can start to see some decompression in that element of the Q2 GDP numbers as well. A bit early to see that.

But what we might get a hint of in terms of what that might look like, tomorrow's PC measure, which looks at the month of May, which is going to come out tomorrow 8:30. That'll be very much perhaps an early indicator of what we should expect to see in terms of that component for Q2.