The U.S. Federal Reserve building, in Washington.Jim Bourg/Reuters
Inflation showing no recent sign of slowing or narrowing in scope leaves U.S. Federal Reserve policy-makers challenged this week over how to characterize their next steps even as the countdown to a contentious U.S. presidential election continues.
The Fed is seen holding its benchmark interest rate steady at 5.25 per cent-to-5.5 per cent at its April 30-May 1 meeting, and a key judgment in the current policy statement – that inflation “remains elevated” – may have to remain in place after the pace of price increases accelerated over the first three months of the year after steadily slowing through 2023.
Details of the most recent price reports, moreover, showed high inflation lodged across a wide array of goods and services, something current voters on interest rate policy including Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin have focused on as a reason to be wary of cutting interest rates.
Data from March, for example, showed that more than half of the items in the personal consumption expenditures price index – used by the Fed to set its 2 per cent inflation target – saw inflation of greater than 3 per cent, well above the share common before the pandemic.
“The Fed has simply run into a brick wall,” Citi Global Chief Economist Nathan Sheets said after data released on Friday showed the PCE index increased at a 2.7 per cent annual pace in March versus 2.5 per cent in February, while the number stripped of volatile food and energy prices was 2.8 per cent, matching February. “This is very strong data and it is not data that has given them any confidence they are meaningfully on their way to 2 per cent … The Fed is simply going to have to wait.”
Many analysts still expect inflation to move lower over the year, eventually allowing policy-makers to call the first quarter a “bump” on the path back towards 2 per cent and proceed with rates cuts they have been preparing for since late last year.
But progress could be slow, and investors have already pushed their outlook for an initial Fed rate reduction to September. That would be in the thick of a U.S. presidential election where the state of the economy may be a central issue – and Fed decisions inevitably parsed through a political lens.
The Fed’s next policy decision will be released on May 1 at 2 p.m. EDT (1800 GMT) with a news conference by Fed Chair Jerome Powell following at 2:30 p.m. (1830 GMT)
With no new economic projections due, the policy statement and Powell’s remarks will anchor whatever guidance may come.
After months that have held hints of economic slowing, including first-quarter economic growth at 1.6 per cent that was the weakest in nearly two years, alongside strong price increases and job growth, there may be little to change officials’ current strategy of delaying rate cuts until the data show a convincing turn.
Policy-maker projections in March signalled three quarter-point rate cuts by the end of the year, with markets geared for the first in June. Powell’s last public comments before this week’s meeting suggest that outlook has eroded.
“The recent data have clearly not given us greater confidence” that inflation will resume its decline, Powell said in comments to a forum in Washington on April 16. “Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”
That general message is likely to get repeated, said J.P. Morgan economist Michael Feroli.
“The post-meeting statement will be little changed from the one released after the previous meeting in March,” Feroli wrote, while Powell is likely to reemphasize the Fed will delay rate cuts as long as needed but also be ready to move sooner if the data warrant.
Fed officials have downplayed a need for another rate increase. The current rate was set in July, a nine-month plateau that already exceeds three of the five prior policy cycles, but still short of the 15– and 18-month holds just before the global financial crisis in 2007 and in the late 1990s.
New projections will be issued in June, and Feroli said he anticipated that Powell “will not defend the March dot plot as still being a relevant guide to the policy outlook.”
Indeed investors now see perhaps only a single cut this year, currently anticipated in September.
The delay, and the sticky inflation that has prompted it, has thrown an unexpected wrinkle into what as of late last year seemed a coming “soft landing” from high inflation. It was something that cheered Fed officials and set the stage for President Joe Biden to envision campaigning on weakening price hikes, still-low unemployment, and falling interest rates for good measure.
Unless the data move strongly to show inflation falling fast or the economy weakening, some see a September cut putting the Fed under a political microscope it would prefer to avoid – particularly given the animosity Republican candidate Donald Trump holds towards Powell for raising rates when Trump was president.
Even if their motivations are data driven and apolitical, optics may argue for avoiding any decisions in the fall, said Vincent Reinhart, chief economist at Dreyfus and Mellon and former head of the Fed’s monetary affairs division.
After May, the Fed has meetings in June, July, September, November following the election, and December. “To preserve your reputational capital, June and December are the safest harbours,” Reinhart said.
The Fed seemed to be favouring June, he said. But “the data ruled that out.”