Is the Fed setting a new bar for interest-rate cuts?

Some Federal Reserve officials, who were surprised by inflation’s rapid descent in 2023, seem to be setting a new bar for interest-rate cuts: a broader pullback in price pressures.

Last week, both Richmond Fed President Thomas Barkin and Boston Fed President Susan Collins indicated they not only want the decline in inflation to continue — like many other officials have said — but also to broaden more meaningfully to housing and other services, given the recent slowing was driven more by goods.

“Are they making a new benchmark, changing the goalposts? It sure seems like it,” said Michael Skordeles, head of U.S. economics for Truist Advisory Services. “They have found enough rationale to put the stake in the ground to be patient.”

Policymakers have left rates unchanged since July, and Fed Chair Jerome Powell has already said that a rate cut next month is unlikely as officials seek greater confidence that inflation is headed back to their 2% target. Waiting for a significant broadening in disinflation could push out the timing of the first rate reduction even further.

The remarkable improvement in inflation seen in recent months — and confirmed in revisions out Friday — largely reflects a reversal in energy prices, healing supply chains and lower costs for things like used cars and clothing. Services inflation has also eased, helped by moderating wage gains amid an influx of workers into the labor market, but progress has been slower.

Consumer prices for goods, excluding food and fuel, increased just 0.2% in 2023.

Meanwhile, the consumer price index for services excluding energy climbed 5.3%.

“I am hopeful but still looking for more conviction that the slowing of inflation is broadening and sustainable,” Mr. Barkin said in a speech last week. On Bloomberg Television, he said he would like to see that trend “continue and broaden” as policymakers get a “few more months” of data.

Fed officials will receive a fresh read on inflation Tuesday with the release of the

CPI, which is estimated to have retreated in January to below 3% for the first time in nearly three years. The Fed’s preferred gauge of underlying inflation was up 1.9% in December on a sixmonth annualized basis, actually below the Fed’s 2% target.

“It appears that they’re concerned that too much of the disinflation is coming from declines in goods prices, which may not persist,” said Michael Gapen, head of U.S. economics at Bank of America.

Parsing the data in different ways underscores why some officials may be more cautious about the inflation outlook.

A measure of inflation created by the Dallas Fed that eliminates the sharpest price changes showed a 3.3% annual gain in December, notably above the 2.6% advance in the government’s personal consumption expenditures price index.

The Atlanta Fed’s consumer price index for costs that are sticky — or those that don’t change often — increased a lofty 4.6% in the past year, nearly double the pre-pandemic average. This metric is often seen as a gauge of businesses’ inflation expectations.