In the statements of the Federal Reserve's monetary policy meetings over the past three years, there has always been a habitual modifier used by the Fed to describe inflation - elevated.
For example, in its June statement, the Federal Reserve described it as follows: "Inflation has eased over the past year, but remains high.
So, when did the Federal Reserve start using the term 'elevated' to describe inflation? The answer can actually be traced back to the September 2021 interest rate meeting.
At that time, the PCE price index, the most favored inflation indicator by the Federal Reserve, exceeded 4% in May, June, and July of that year, which was twice the Fed's 2% inflation target. It was no longer possible to attribute the inflation problem to the "temporary" Federal Reserve, and finally acknowledged that inflation in the United States was already "high" at that time.
And the fact ultimately proved that the US inflation figures were completely out of control like wild horses, completely out of the control of the Federal Reserve.
However, some industry insiders now foresee that at the Federal Reserve's monetary policy meeting at the end of this month, the Fed is likely to make a far-reaching change in wording: completely deleting or modifying the phrase "elevated" used to describe inflation mentioned above
And once this scene really happens, there is no doubt that it will also be the strongest signal that the Federal Reserve plans to cut interest rates as early as September and begin its monetary easing cycle.
At present, pricing in the interest rate futures market has shown that traders are almost 100% confident that the Federal Reserve will cut interest rates in September.
Some industry insiders also suggest that once the Federal Reserve begins to downgrade the description of inflation to a milder rhetoric than "elevated," it may also lead to the Fed modifying another key sentence in its current policy statement - that it is inappropriate to lower the target range of interest rates until there is greater confidence that inflation will continue to move towards 2%.
Why does the industry speculate that the above wording will change?
The reason why industry insiders speculate that the above wording may change is partly because since January, internal staff of the Federal Reserve have stopped describing inflation as "elevated" in some documents after the PCE price index fell below 3%; On the other hand, inflation is currently slowing down more widely throughout the US economy, giving Federal Reserve officials increasing confidence that the economic slowdown will continue.
Recently, Federal Reserve officials have also started using the phrase "gradually approaching" to describe how far away policy changes are from, and have hinted at possible tipping points that may require the Fed to change its description of the economy and its policy response to it.
The release of the June PCE price index in the United States this Friday is also likely to be a catalyst for the Federal Reserve to make relevant changes in wording. Atlanta Fed President Raphael Bostic said in late June, "I would be surprised if we consider (PCE) 0.5 percentage points above the target not high," and indirectly pointed out that an inflation rate of 2.5% or lower would be a benchmark - at least considering changing the description of inflation.
Many economists believe that the June PCE data released on July 26th may come within this threshold. Currently, economists surveyed by the media generally predict that the PCE price index in June in the United States is expected to decrease from 2.6% in the previous month to 2.4%, and the core PCE price index will also decrease from 2.6% in the previous month to 2.5%.
Richmond Fed President Barkin also pointed out in an interview last week that the opening language of the Fed's monetary policy statement, including descriptions of growth, the job market, and inflation, is used by us to "evaluate the economy. As the new PCE data is released before the meeting, 'we will see what the numbers are and make any appropriate adjustments'.
Some industry insiders also believe that the Federal Reserve currently has sufficient reasons to make relevant wording changes.
Neil Dutta, the head of economic research at Renaissance Macro Research, stated that "they (Federal Reserve officials) should be more proactive in acknowledging that inflation has cooled down." In a recent analysis report, he pointed out that the inflation problem that once plagued Federal Reserve officials seems to be shifting in the direction they are happy to see.
For example, the US Bureau of Labor Statistics previously developed a new housing inflation indicator that can capture housing inflation trends faster than the slower changing measurement method used by the benchmark CPI. The indicator has shown a "meaningful slowdown" - rents have been declining throughout the second quarter. Dutta stated that housing rental inflation is further slowing down.
Omair Sharif, the head of Inflation Watch magazine, also pointed out that in the current context, deleting the description of "elevated" inflation is not only reasonable, but "may be a good way to signal the first drop in September at the July meeting.