Will the policy rate bring down a prices index sitting at 70.3 per cent?

The premise behind the dissent

Minneapolis Fed president Neel Kashkari said he sees no evidence that monetary policy is currently restrictive and called for the rate to rise in small steps beginning in September. The Federal Open Market Committee held the policy rate in a range of 3.5 per cent to 3.75 per cent at its previous meeting; nine members voted to hold while Kashkari, Lorie Logan and Beth Hammack dissented in favour of a quarter-point increase.^[1]

A policymaker's stance does not establish which channel that stance would run through. Kashkari cites three grounds and all three sit on the demand side: strong corporate earnings, resilient consumer spending and a stable labour market. A rate rise first makes credit-financed spending more expensive; where inflation originates outside credit-fed demand, it is worth asking separately which item that channel would squeeze.^[1]

Where does the services survey attach the channel?

In a services survey published the same day, the prices index rose 2.6 points to 70.3 per cent while the employment index fell 3.8 points to 47.4 per cent. Business activity at 59.1 per cent and new orders at 57.2 per cent stayed in expansion. Among respondent comments, a transportation firm said the price increases come mainly from fuel and labour costs, and a construction firm said sales continue to slide despite discounts as cost pressure mounts from all fronts.^[2]

That picture changes where a rate increase would first make contact. A cost push coming from fuel and wages stays insensitive to borrowing costs; the hiring decision remains sensitive to them, and in this survey it has already contracted. In this combination, tightening touches the employment line first and prices only later. The rival explanation deserves weight: new orders at 57.2 per cent and business activity at 59.1 per cent may show demand still validating the price increases, in which case the demand channel is the right one. The distinguishing observation is whether new orders stay above the 50 threshold while the prices index eases.^{[2], [1]}