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Fed has been 'notoriously bad' at committing to forward-looking plans: Strategist

Don't expect interest rates to sink anytime soon. Minutes from July’s Federal Open Market Committee (FOMC) meeting indicate the Fed anticipates another 50 basis point hike in September.

Kristina Hooper, Invesco Chief Global Market Strategist, discussed the Fed’s potential plans for future rate hikes amid soaring inflation.

“I've always believed that sooner rather than later the Fed is going to need to pivot to a less hawkish stance,” Hooper told Yahoo Finance Live. “I think it's key to recognize that the Fed has been notoriously bad at descriptions around time, right? Think about the term 'transitory.'”

The Federal Reserve has changed its footing over the past year when discussing inflation. Chair Jerome Powell infamously called inflation ‘transitory’ in August 2021, suggesting rising prices were a short-term phenomenon. However, as inflation accelerated during the first half of 2022, Powell retired the use of that term.

Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022. (AP Photo/Manuel Balce Ceneta)
Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022. (AP Photo/Manuel Balce Ceneta) (ASSOCIATED PRESS)

Hopper noted that the Fed is currently focused on core inflation and consumer expectations in its pursuit to restore price stability. In July’s Consumer Price Index (CPI) report, core inflation – inflation excluding food and energy prices – rose 5.9%, which is ways away from the Fed’s 2% target.

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“We've heard the Fed over and over again say that they want to see longer-term inflation expectations, well-anchored. And what we got from July, Michigan inflation expectations, that's the rate on the consumers' expectations for five years ahead was 2.9%,” Hopper added.

With lower inflation expectations per the New York Fed’s Survey of Consumer Expectations, the market has begun pricing in lower rate hikes in the future. CME Group’s FedWatch Tool forecasts rate hikes to slow down in the first quarter of 2022, with some investors pricing in a price cut. July’s meeting minutes also suggest a rate cut if economic conditions were improving.

Nonetheless, Hopper stressed that the Fed is ultimately in the driver’s seat and can steer the economy into or out of a recession.

“Much will be dictated by the Fed. Luckily, they continue to articulate a real commitment to being data dependent, and being sensitive to incoming data. And I think that's all we can hope for. That to me is how the Fed turns monetary policy, which is notoriously regarded as a blunt instrument into more of a surgical tool. It's still a blunt instrument, but it can be a bit more surgical if they are sensitive to incoming data,” Hopper said.

Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22

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