Explained | Charting the Fed's policy path

The Federal Reserve is seen holding the benchmark policy rate steady at its September 19-20 meeting, but data in the meantime will shape whether economic projections issued after that session will still show one more expected rate increase by the end of this year, and rate cuts beginning in 2024.

The target policy rate has been raised to a range of 5.25 per cent to 5.50 per cent from near zero in March of 2022, and inflation measured by the Fed's preferred Personal Consumption Expenditures price index (PCE) has fallen to 3 per cent in June from its peak rate of 7 per cent last summer.

While Fed Chair Jerome Powell has said the pieces of the low-inflation "puzzle" may be aligning, he does not trust it yet.

Here is a guide to some of the numbers shaping the policy debate:

Job openings (Released Aug 29, next release on Oct 3):

Powell keeps a close eye on the Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, for information on the imbalance between labor supply and demand, and particularly on the number of job openings for each person without a job but looking for one. During the pandemic there were nearly two jobs for every jobseeker. That ratio has dropped as the Fed's rate hikes have slowed labor market demand. By July it had fallen to 1.5-to-1, its lowest level since September 2021. Before the pandemic levels around 1.2 were considered tight for the US labor market.

Producer prices (Released Aug 11, next release Sept 14):

The Producer Price Index for July came in above expectations - giving the bond market some jitters - as the cost of services rebounded at the fastest pace in nearly a year.

That said, PPI did not appear to reflect enough of a departure from other recent data to shake Fed officials from their respective positions over the appropriate move at the September meeting: A bit hotter than expected, which will buttress the hawks' inclination for a hike, but still showing the trend remained consistent with a moderation in inflationary pressures, which will satisfy the doves' preference to hold steady.

Officials get one more PPI report before they convene next.

Inflation expectations (Released Aug 11, next release Aug 25):

Consumers' estimates of what inflation will average over the next 12 months and the next five years both moderated as August began, the University of Michigan reported. At the one-year horizon, expectations slipped to 3.3 per cent, which were the lowest since March 2021. At five years, they dipped to 2.9 per cent, the lowest in five months.

Policymakers worry about inflation expectations because if they become unanchored and drift upward, consumers may begin acting in ways that keeps actual inflation higher than desired.

Fed officials will see two more survey results before their meeting.

Inflation (Released on Aug 10, next release on Aug 31):

The Consumer Price Index rose slightly in July to a 3.2 per cent annual rate from 3 per cent in June, in line with expectations. But for the Fed, the underlying, or "core" number, stripped of food and energy costs held better news. It declined slightly from 4.8 per cent to 4.7 per cent. In addition, most of the increase was driven by rising shelter costs, which Fed officials feel are on track to cool steadily in the months ahead.

The Personal Consumption Expenditures price index, used to set the Fed's 2 per cent target, meanwhile skidded to a two-year low in June, dipping to 3 per cent. Of even greater note was that the rate stripped of food and energy costs dropped more than expected to its lowest since September 2021 at 4.1 per cent. Fed officials see that as a better indicator of underlying inflation trends, and until June it had been stuck at about 4.6 per cent since last December.

Many economists expect continued steady progress on inflation from here. If realized, that could undercut arguments for more hikes, and may shift the Fed's relentlessly hawkish tone.

Fed officials will see one more PCE report and one more CPI print before they meet next month.

Employment (Released on Aug 4, next release on Sept 1):

The US economy in July added 187,000 jobs, fewer than economists expected and providing fresh evidence of the kind of labor market cooling that Fed officials say is needed to ease inflation pressures.

Hourly wage gains, however, remained strong, holding at 4.4 per cent for a fourth straight month, and the unemployment rate ticked down to 3.5 per cent. Both are signs of labor market tightness that may cast doubt on whether the Fed really has done enough.

The mixed results throw the question of labor market strength forward to the next employment report, due to arrive a couple weeks before the next rate-setting meeting.

Retail sales (Released Aug 15, next release on Sept 14):

Retail sales rose more than expected in July, increasing 0.7 per cent in a surprising sign of US consumer resilience. The continued pace of consumer spending has surprised the Fed, and has been among the reasons overall buoyant economic growth has been on the Fed's radar as an inflationary risk that could warrant higher interest rates.

Bank data (Released every Thursday and Friday):

To some degree the Fed wants credit to become more expensive and less available. That is how increases in its policy rate influence economic activity. But bank failures in the spring threatened broader stress in the industry and a worse-than-anticipated credit crunch. Weekly data on bank lending shows bank credit has fallen on a year over year basis since mid-July. Borrowing by banks from the Fed, meanwhile, remains elevated but has been slowly declining on a week-to-week basis.