Nor did the central bank say it wouldn’t keep raising rates, though a hint by Fed Chairman Jerome Powell in his postmeeting press conference that weaker data could slow the central bank’s urgency kicked off an impressive rally in stocks and other assets. Mr. Powell highlighted projections policymakers provided in June showing a further 1 percentage point increase in the targeted rate range by the end of the year and a further half-point increase next year. And he said that if incoming data suggest it is required, another three-quarter point could happen.
But the next couple of months could cut into some of the Fed’s resolve on rates. Inflation will undoubtedly look high by September, but not as high as in the most recent data. Gasoline prices have fallen—as of Wednesday, a gallon of regular averaged $4.30 gallon at the pump nationally, versus a mid-June record of $5.02, according to AAA—and futures contracts suggest they will continue to retreat through the fall. Slowing consumer spending for home goods, in combination with too-high inventories, is prompting retailers to offer discounts. Easing supply-chain pressures and weakening commodity prices suggest some inflation relief elsewhere.
More importantly, as Mr. Powell acknowledged, the economy is showing weakness. Demand for many goods has begun to slip, but considering how high inflation-adjusted sales are relative to prepandemic trends, further declines could be in the offing. Rising services demand could take up some of the slack, but initially not entirely. Meanwhile, the housing market keeps looking worse, with the Commerce Department reporting that new home sales in June fell to their lowest level since April 2020, when the pandemic was keeping many house hunters away.
So far, the labor market appears to have been relatively untouched, despite headlines about some big companies announcing job cuts. That might not continue for much longer. A large number of job openings suggests outright employment declines aren’t in the immediate offing, but job growth could be notably slower by the time the fall comes around.
That portends an environment where at least some Fed officials might become warier of tightening. It is one thing to raise rates when people curse at the gas pump and see for-hire signs everywhere. It is another when that is no longer the case.