Officials head into Fed meeting with uncertain long-term inflation outlook
June 18 (Reuters) - Among the uncertainties facing Federal Reserve officials as they debate the proper setting of monetary policy, one of the trickiest has been divining where inflation is going, especially over the longer run.
Fed officials hold that expectations about where prices are heading exert a strong pull on current levels of inflation. More importantly, stable long-term expectations grant officials confidence that whatever challenges the economy faces, the public has faith inflation will be steady eventually.
The last few months have been tricky in that regard, notably in surveys of households.
President Donald Trump's global trade war is widely expected to push up inflation via surging import taxes. It's unclear whether that will be a one-time hit or something longer lasting. If it's the former, some Fed officials have signaled they could look through it, but the latter could call for interest rate policy to remain on the tighter side.
The Fed is expected to hold rates steady on Wednesday, but it is less clear after that just when the central bank might cut rates, as it penciled in last March.
When it comes to survey-based measures of the price-pressure outlook, the Federal Reserve Bank of New York and the University of Michigan questionnaires are the most closely watched. Both have shown shifts in near-term expectations, but for some time their longer-run readings have diverged. Market-based readings, meanwhile, have generally been more stable. Collectively it's led policymakers to question what's really going on.
Fed Governor Christopher Waller said this month 'we are seeing a dramatic disparity' in the inflation expectations data, including that of professional forecasters.
Waller, citing the Michigan data, dismissed it. He noted that if households were truly expecting high inflation in the longer-run future they'd be pressing for much higher wages to compensate, and they aren't. He also said there'd also likely be a persistent surge in consumer spending to get ahead of higher prices, and while that appeared to have occurred briefly for some big-ticket purchases like automobiles earlier this spring, it has not been sustained.
'I prefer to look at market-based measures of inflation compensation and professional forecasters' expectations because they have money on the line,' Waller said, and noted as a result, 'my assumption (is) that longer-term inflation expectations remain anchored.'
Governor Adriana Kugler also said, opens new tab the Michigan data caught her attention, noting it showed 'the most dramatic increases' but also flagging methodology changes that have caused some to question its findings.
'While I take seriously the concern that recent methodological changes in the survey may have made this measure less reliable, this survey is a longstanding and important barometer of consumer sentiment, and I still monitor the signals it is giving us closely.'
The University of Michigan's Surveys of Consumers have been asking households to estimate what inflation would be since the late 1970s. When its 5-year inflation estimate surged in early June 2022, it helped nudge the Fed toward an outsized 75-basis-point rate hike over the more modest action markets had been expecting.
Last year, the survey transitioned from phone-based interviews to web-based interviews. Many economists have wondered if that has affected its findings, especially since Michigan data on longer-term expectations has been notably higher than New York Fed data pointing to a steadier outlook.
Joanne Hsu, who directs the University of Michigan survey, dismissed the methodology shift as a non-issue. The organization ran parallel surveys — both phone and web — for seven years before formally changing and from this experience, she said, 'we know very well how inflation expectations operate via web interviewing versus phone interviewing, and they basically move in parallel.'
Hsu noted another key difference is the New York Fed uses panels of respondents who are involved for a year while her organization rotates participants. Hsu said engaging respondents repeatedly causes them to pay more attention to what they're being asked about, and in being better informed they're less likely to send a reliable signal about how the broader public views price pressures.
Hsu said better survey outcomes come from a mix of 'informed people, uninformed people, high-income people, low-income people, you know, people across the spectrum. And so that's what we're trying to do, we're trying to get all of those different types of people into our data' because that's the truest expression of expected inflation.
Hsu cautioned survey watchers from fixing on specific numbers and said, 'the trend is much, much more important than the level.'
'People are very worried about the inflation outlook right now,' she said, although those fears have abated somewhat amid Trump's retreat for now from some of the stiffest tariffs he had proposed earlier in the year.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
an hour ago
- Reuters
Iran oil doomsday in Hormuz may be more fear than reality: Bousso
LONDON, June 22 - U.S. strikes on several Iranian nuclear sites represent a meaningful escalation of the Middle East conflict that could lead Tehran to disrupt vital exports of oil and gas from the region, sparking a surge in energy prices. But history tells us that any disruption would likely be short-lived. Investors and energy markets have been on high alert since Israel launched a wave of surprise airstrikes across Iran on June 13, fearing disruption to oil and gas flows out of the Middle East, particularly through the Strait of Hormuz, opens new tab, a chokepoint between Iran and Oman through which around 20% of global oil and gas demand flows. Benchmark Brent crude prices have risen by 10% to over $77 a barrel since June 13. While Israel and Iran have targeted elements of each other's energy infrastructure, there has been no significant disruption to maritime activity in the region so far. But President Donald Trump's decision to join Israel by bombing three of Iran's main nuclear sites in the early hours of Sunday could alter Tehran's calculus. Iran, left with few cards to play, could retaliate by hitting U.S. targets across the region and disrupting oil flows. While such a move would almost certainly lead to a sharp spike in global energy prices, history and current market dynamics suggest any move would likely be less damaging than investors may fear. The first question to ask is whether Iran is actually capable of seriously disrupting or blocking the Strait of Hormuz. The answer is probably yes. Iran could attempt to lay mines across the Strait, which is 55 km (34 miles) wide at its narrowest point. The country's army or the paramilitary Islamic Revolutionary Guard Corps (IRGC) could also try to strike or seize vessels in the Gulf, a method they have used on several occasions in recent years. Moreover, while Hormuz has never been fully blocked, it has been disrupted several times. During the 1980s Iran-Iraq war, the two sides engaged in the so-called "Tanker Wars" in the Gulf. Iraq targeted Iranian ships, and Iran attacked commercial ships, including Saudi and Kuwaiti oil tankers and even U.S. navy ships. Following appeals from Kuwait, then-U.S. President Ronald Reagan deployed the navy between 1987 and 1988 to protect convoys of oil tankers in what was known as Operation Earnest Will. It concluded shortly after a U.S. navy ship shot down Air Iran flight 655, killing all of its 290 passengers on board. Tensions in the strait flared up again at the end of 2007 in a series of skirmishes between the Iranian and U.S. navies. This included one incident where Iranian speedboats approached U.S. warships, though no shots were fired. In April 2023, Iranian troops seized the Advantage Sweet crude tanker, which was chartered by Chevron, in the Gulf of Oman. The vessel was released more than a year later. Iranian disruption of maritime traffic through the Gulf is therefore certainly not unprecedented, but any attempt would likely be met by a rapid, forceful response from the U.S. navy, limiting the likelihood of a persistent supply shock. Indeed, history has shown that severe disruptions to global oil supplies have tended to be short-lived. Iraq's invasion of neighbouring Kuwait in August 1991 caused the price of Brent crude to double to $40 a barrel by mid-October. Prices returned to the pre-invasion level by January 1992 when a U.S.-led coalition started Operation Desert Storm, which led to the liberation of Kuwait the following month. The start of the second Gulf war between March and May 2003 was even less impactful. A 46% rally in the lead-up to the war between November 2002 and March 2003 was quickly reversed in the days preceding the start of the U.S.-led military campaign. Similarly, Russia's invasion of Ukraine in February 2022 sparked a sharp rally in oil prices to $130 a barrel, but prices returned to their pre-invasion levels of $95 by mid-August. These relatively quick reversals of oil price spikes were largely thanks to the ample spare production capacity available at the time and the fact that the rapid oil price increase curbed demand, says Tamas Varga, an analyst at oil brokerage PVM. Global oil markets were also rocked during the 1973 Arab oil embargo and after the 1979 revolution in Iran, when strikes on the country's oilfields severely disrupted production. But those did not involve the blocking of Hormuz and were not met with a direct U.S. military response. The current global oil market certainly has spare capacity. OPEC+, an alliance of producing nations, today holds around 5.7 million barrels per day in excess capacity, of which Saudi Arabia and the United Arab Emirates hold 4.2 million bpd. The concern today is that the vast majority of the oil from Saudi Arabia and the UAE is shipped via the Strait of Hormuz. The two Gulf powers could bypass the strait by oil pipelines, however. Saudi Arabia, the world's top oil exporter, producing around 9 million bpd, has a crude pipeline that runs from the Abqaiq oilfield on the Gulf coast in the east to the Red Sea port city of Yanbu in the west. The pipeline has capacity of 5 million bpd and was able to temporarily expand its capacity by another 2 million bpd in 2019. The UAE, which produced 3.3 million bpd of crude oil in April, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz. But this western route could be exposed to attacks from the Iran-backed Houthis in Yemen, who have severely disrupted shipping through the Suez Canal in recent years. Additionally, Iraq, Kuwait and Qatar currently have no clear alternatives to the strait. It is possible that Iran will choose not to take the dramatic step of blocking the strait in part because doing so would disrupt its own oil exports. Tehran may also consider any further escalation fruitless in light of U.S. involvement and will instead try to downplay the importance of the U.S. strikes and come back to nuclear negotiations. In the meantime, spooked energy markets, fearing further escalation, are apt to respond to the U.S. strikes with a sharp jump in crude prices. But even in a doomsday scenario where the Strait of Hormuz is blocked, history suggests markets should not expect any supply shock to be persistent. Enjoying this column? Check out Reuters Open Interest (ROI),, opens new tab your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI, opens new tab can help you keep up. Follow ROI on LinkedIn, opens new tab and X., opens new tab
The Independent
an hour ago
- The Independent
Flights from London to Doha and Dubai cancelled after US strikes Iran
Flights from London to Dubai and Doha have been cancelled after Donald Trump ordered a US attack on Iran's nuclear sites. It comes after a British Airways (BA) flight from London Heathrow to Dubai was diverted to Zurich on Saturday night. The BA109 flight departed from the UK at 9.53pm on Saturday and reached Saudi Arabia before the Boeing 787 Dreamliner changed its course, landing in Switzerland, according to flight-tracking website Flightradar24. All of the airline's flights to Dubai and Doha that were scheduled to depart from Heathrow on Sunday have been cancelled, including return flights, the company said. Israel announced on Sunday that it had closed its airspace to both inbound and outbound flights in the wake of the US attacks. The US struck three nuclear test sites in Iran overnight prompting Tehran to launch a retaliatory ballistic missile barrage against Israel. In a statement, British Airways said: 'As a result of recent events, we have adjusted our flight schedule to ensure the safety of our customers and crew, which is always our top priority. 'We are contacting our customers to advise them of their options while we work through this developing situation.' BA is offering a flexible booking policy for customers already booked onto flights to Dubai and Doha between Sunday and Tuesday who wish to change their dates of travel.
Reuters
2 hours ago
- Reuters
Oil to open higher as US strikes on Iran boost supply risk premium
LONDON, June 22 (Reuters) - Oil is likely to rise by $3-5 per barrel when trading resumes on Sunday evening after the U.S. attacked Iran at the weekend, market analysts said, with gains expected to accelerate only if Iran retaliates hard and causes a major oil supply disruption. U.S. President Donald Trump said he had "obliterated" Iran's main nuclear sites in strikes overnight, joining an Israeli assault in an escalation of conflict in the Middle East as Tehran vowed to defend itself. Iran is OPEC's third-largest crude producer. Global oil benchmark Brent crude could gain $3 to $5 per barrel when markets open, SEB analyst Ole Hvalbye said in a note. Brent settled at $77.01 a barrel on Friday and U.S. West Texas Intermediate at $73.84. "An oil price jump is expected," said Jorge Leon, head of geopolitical analysis at Rystad and a former OPEC official. "Even in the absence of immediate retaliation, markets are likely to price in a higher geopolitical risk premium." Crude had settled down on Friday after the U.S. imposed fresh Iran-related sanctions, including on two entities based in Hong Kong, and counter-terrorism-related sanctions, according to a notice posted to the U.S. Treasury Department website. Brent has risen 11% while WTI has gained around 10% since the conflict began on June 13 with Israel targeting Iran's nuclear sites and Iranian missiles hitting buildings in Tel Aviv. Currently stable supply conditions and the availability of spare production capacity among other OPEC members have limited oil's gains. Risk premiums have typically faded when no supply disruptions occurred, said Giovanni Staunovo, analyst at UBS. "The direction of oil prices from here will depend on whether there are supply disruptions - which would likely result in higher prices - or if there is a de-escalation in the conflict, resulting in a fading risk premium," he said. A senior Iranian lawmaker on June 19 said that the country could shut the Strait of Hormuz as a way of hitting back against its enemies, though a second member of parliament said this would only happen if Tehran's vital interests were endangered. About a fifth of the world's total oil consumption passes through the strait. SEB said that any closure of the strait or spillover into other regional producers would "significantly lift" oil prices, but said they saw this scenario as a tail risk rather than a base case given China's reliance on Gulf crude. Ajay Parmar, oil and energy transition analytics director at consultancy ICIS, said it was unlikely Iran would be able to enforce a blockage of the strait for too long. "Most of Iran's oil exports to China pass through this strait and Trump is unlikely to tolerate the inevitable subsequent oil price spike for too long - the diplomatic pressure from the world's two largest economies would also be significant," he said.
