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Jonathan Levin

Powell Is Looking Well Past the Next Inflation Report

Market bulls think next week’s consumer price index report will be the catalyst that allows the Federal Reserve to turn less hawkish. They better think again.

Federal Reserve Chair Jerome Powell is playing the long game.

Federal Reserve Chair Jerome Powell is playing the long game.

Photographer: Drew Angerer/Getty Images

If you believe market bulls, the next US inflation report on Tuesday could be the one that gives the Federal Reserve the opportunity to turn less hawkish. Their thesis is that a second-straight slowdown in the monthly pace of inflation -- especially in the core measure that excludes volatile food and energy — might allow the central bank to raise interest rates in smaller increments going forward. Fed Chair Jerome Powell just gave a couple of key reasons for why banking on such a scenario would be foolish. 

First, the Fed is clearly concerned about the strength in the labor market, which has wages growing above trend. Headline and core inflation were always bound to come off their boil after supply-chain snarls started to untangle and energy prices tumbled. And next week’s consumer price index report is forecast to show a 0.1% decline in August after no change in July. But the Fed is as concerned with potential inflationary pressures next year and in 2024 as it is with this year’s, even if many may indeed prove “transitory.” That wouldn’t mean inflation has been vanquished, though.