"New Fed Communications Agency": The trend of interest rate hikes in the United States in July has been determined, and the focus of debate is under what circumstances future rate hikes will occur.

On Friday, Nick Timiraos, a Wall Street Journal reporter known as the "mouthpiece of the Federal Reserve" and dubbed the "New Fed News Agency," wrote that the direction of the July Fed meeting has been determined, with a likely 25 basis point rate hike. The real debate at the July meeting may focus on when to raise rates again in September or the fall.

Timiraos pointed out that many Fed officials have expressed support for another 25 basis point rate hike, which would bring the federal funds rate to its highest level in 22 years. Despite data released this week showing a cooling of inflation, officials still have the motivation to raise rates in July, partly due to stronger-than-expected hiring and economic activity since May. In addition, some officials want to see inflation continue to slow down.

In his article, Timiraos also mentioned that raising rates would lower asset prices and increase borrowing costs, thereby slowing down economic growth through the financial markets. Officials are concerned that if they don't raise rates in July as widely expected, it could trigger a market rally, leading to looser financial conditions and ultimately making it more difficult to lower inflation.

This week, the U.S. released two major data points for June: CPI and PPI, both of which showed a significant cooling of inflation. The year-on-year increase in June CPI was 3%, lower than expected and the lowest since March 2021, while core CPI increased by 4.8% year-on-year, also lower than expected and the lowest since October 2021. June PPI in the U.S. also cooled more than expected to 0.1%, the lowest since August 2020, while core PPI increased by 2.4% year-on-year, lower than expected and the lowest since February 2021.

According to Timiraos, the slowdown in inflation data increases the possibility that the July rate hike could be the last one in this cycle.

The Fed paused its rate hikes as scheduled at the June meeting but hinted at two more hikes. Fed officials raised the median expectation for the peak rate by 50 basis points to 5.6%. The dot plot shows that two-thirds of Fed officials expect rates to be above 5.5% this year, meaning at least two 25 basis point rate hikes. The Fed also raised its GDP growth forecast for this year by more than double to 1%, lowered its unemployment rate forecast for this year, and raised its core PCE inflation forecast.

Although several hawkish officials wanted to continue raising rates in June, Powell ultimately gained unanimous support for a hold at the June meeting, partly because officials strongly hinted at the possibility of further rate hikes.

Fed Chairman Powell previously stated that the decision to keep rates unchanged at the June meeting was to give officials more time to study the impact of Fed policies. Officials also wanted to understand the economic impact of the rise in bank financing costs following the collapse of three mid-sized banks earlier this year.

Powell also stated, "We have seen inflation persist and strengthen more than we expected time and time again. At times, circumstances may change, and we must be prepared to track the data, exercise some patience, and let the relevant situation develop." "

The internal debate between hawks and doves within the Federal Reserve is unfolding. Based on the June meeting, two Fed officials believe that there is no need for further interest rate hikes this year. Atlanta Fed President Raphael Bostic previously stated that the Fed should wait and let the policies take effect. Timiraos predicts that hawkish officials may express their views at this month's meeting, suggesting that the Fed should be prepared for another rate hike in September.

Hawkish officials within the Federal Reserve are concerned that it will become more difficult to further lower inflation if economic activity and hiring slow down. Timiraos cites speeches from several hawkish Fed officials:

• Fed Governor Lael Brainard stated on Thursday evening that he wants to see evidence that the recent slowdown in inflation is not temporary. He said, "The recent reports have warmed my heart, but I have to use my head to make policy decisions. I cannot rely on a single data point." Brainard said that if inflation does not continue to decline and there are no significant signs of economic slowdown, he will support another rate hike in September. On the other hand, if the data suggests that the Fed is making progress and the July and August CPI reports are similar to June's, it indicates that rate hikes could be paused.
• Dallas Fed President Lorie Logan, who had voting rights at this year's FOMC meetings, expressed great concern about whether inflation can sustainably and timely reach the target. Logan revealed that although she leaned towards raising rates, she ultimately voted to pause rate hikes in June because officials issued overall communication indicating a strong need for further rate hikes. At this moment, it is crucial for the Fed to follow through on the signals sent during the June meeting.
• Cleveland Fed President Loretta Mester stated this week, "I hear from my business contacts in my region, if you think rates need to be raised, then do it."

Timiraos also writes that officials who believe that the full impact of Fed rate hikes has not yet materialized are more likely to wait until November or December to decide whether further rate hikes are appropriate after the July meeting. If economic activity further slows down by then, officials may decide to pause rate hikes and enter a new phase of tightening actions - maintaining interest rates stable in the face of slowing inflation. This would result in an increase in real interest rates after adjusting for inflation. "