Former Federal Reserve Chairman Bernanke: The Fed is expected to raise interest rates in July, possibly marking the end of this tightening cycle.

Former Federal Reserve Chairman Bernanke said on Thursday that the Fed is expected to raise interest rates in July, which may be the last rate hike of this cycle. "It seems very clear that the Fed will raise rates by 25 basis points at the next meeting. The rate hike in July may be the last one."

Currently, the market widely expects the Fed to raise interest rates by 25 basis points at the upcoming FOMC meeting next week. According to data from the federal funds futures market, traders are almost certain that the Fed will raise rates at the meeting on July 25-26, but they also expect limited possibilities of further rate hikes thereafter.

The latest media survey shows that the majority of economists expect the Fed to raise rates again next week, ending the 16-month rate hike cycle. Only one-fifth of them expect additional rate hikes before November to curb inflation.

Bernanke expects that with the retreat of rent increases and the decline in car prices, inflation can sustainably fall to the level of 3%-3.5% in the next six months. By early next year, US inflation is expected to drop to around 3% or slightly higher. After that, he expects the Fed to gradually try to bring inflation down to the target of 2%.

Bernanke's optimistic view on inflation is similar to that of another former Fed leader, Janet Yellen, the current US Treasury Secretary. Yellen stated this week that the cooling labor market plays a key role in slowing down US inflation, and pressures from housing costs and car prices are also declining, which is expected to continue pushing down price pressures. She also hinted that corporate profit margins may decline. However, Yellen warned against being too optimistic because of the June CPI.

Last week, the US 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 US CPI in June was 3%, lower than expected, reaching the lowest level since March 2021, and the year-on-year increase in core CPI was 4.8%, lower than expected, reaching the lowest level since October 2021. The June PPI in the US also cooled more than expected to 0.1%, reaching a new low since August 2020, and the year-on-year increase in core PPI was 2.4%, lower than expected, reaching the lowest level since February 2021.

Bernanke believes that before announcing victory over inflation, the Fed wants to see a better balance between labor market supply and demand. Regarding the current labor market, Bernanke pointed out that it is still hot. Although the number of job vacancies in JOLTS has declined, there are still about 1.6 vacancies per unemployed person.

As mentioned in a previous article by Wall Street News, the ratio of job vacancies to the number of unemployed reached a record level of over 2 in March last year. This ratio was 1.2 before the COVID-19 pandemic and is still significantly higher than the long-term trend level.

Bernanke expects that the US economy may experience a slowdown, which is the cost of fighting inflation. However, he emphasized that even if there is any recession, it is likely to be mild, meaning a very moderate increase in the unemployment rate and economic slowdown. He would be very surprised if the US economy experiences a severe recession next year. Nick Timiraos, a Wall Street Journal reporter known as the "mouthpiece of the Federal Reserve" and dubbed the "new Federal Reserve news agency," wrote last week that the Fed is expected to raise interest rates by 25 basis points in July. The real debate at the July meeting may focus on when to raise rates again in September or the fall. Slowing inflation data has increased the possibility that the July rate hike will be the last one.