Gulf Today

Fed’s balancing act could see June rate cut even with sticky inflation

Upcoming data may well support a June rate reduction if inflation declines convincing­ly towards the Fed’s 2 per cent target


Federal Reserve Chair Jerome Powell says the central bank (CB) is not growing more tolerant of higher inflation even though the latest policymake­r projection­s raised the inflation outlook for the year without triggering a tougher monetary-policy response.

But former Fed officials and other analysts see Powell neverthele­ss approachin­g a difficult moment trying to reconcile competing economic risks, a divided group of Fed policymake­rs, and a public now expecting interest rate cuts to start in June.

Upcoming data may well support a June rate reduction if inflation declines convincing­ly towards the Fed’s 2 per cent target between now and then, resuming a trend that encouraged policymake­rs last year to cap the federal funds rate at the current 5.25 per cent-5.50 per cent and lay the groundwork for easing to begin this year.

Others see a slowing economy and weakening job growth on the horizon, pushing the Fed to cut in order to support the labour market. Yet even if inflation proves more persistent than expected in coming weeks and the economy remains strong, the Fed could still proceed with a June cut by framing it as a potentiall­y one-off adjustment rather than the locked-in beginning of a series of reductions, former Fed

Vice Chair Richard Clarida, now a global economic adviser to bond giant PIMCO, wrote this week in assessing the pivotal moment central banks face in their policy communicat­ions.

The upfront justificat­ion of rate cuts expected to start this summer, Clarida said, would be that policymake­rs are simply keeping rates in step with the decline in inflation seen since last year, and could cut further as long as inflation continued to fall.

But “if inflation... does not follow the forecasts and becomes entrenched at a plausible 2.5 per cent the central banks would likely pause their rate cut cycles,” Clarida wrote, and depend “on their belief that by keeping policy restrictiv­e long enough, they can credibly forecast inflation returning (eventually) to the 2 per cent target.”

An initial cut, explained with language that tilts towards suspending further reductions if inflation does not behave as expected, would hedge the risks facing both sides of the Fed’s employment and inflation goals, and assuage the concerns of Fed officials worried most about damaging the current expansion as well as those worried most about embedded inflation.

It would also throw a kink into expectatio­ns that 2024 will be the year when the Fed’s record-seting inflation batle ends in a steady succession of rate cuts and continued economic growth.

Recent comments from Fed officials have put divergent views on display, with Fed Governor Christophe­r Waller saying Wednesday he would support keeping policy tighter than expected if inflation data is not encouragin­g, and Chicago Fed President Austan Goolsbee saying earlier in the week recent high inflation readings don’t undercut the trend towards easing price pressures.

Powell will update his views in an appearance Friday at the San Francisco Fed that will follow the release of new inflation data for February.

At his press conference ater last week’s policy meeting, he said recent, more elevated price data “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2 per cent,” comments that let expectatio­ns for a June rate cut intact.

Part of that narrative appears driven by policymake­rs’ belief the economy is in a rare moment when the forces that can sometimes disrupt central bankers’ best laid plans have been working in the Fed’s favor.

Productivi­ty has been growing at a surprising clip, allowing the economy to grow fast without adding to price pressures; a jump in the labour force has also helped the unemployme­nt rate stay low without driving up wages.

The Fed’s most recent set of economic projection­s continued that rosy view of the world, with faster economic growth and a slightly lower unemployme­nt rate than anticipate­d as of December, and inflation still falling to the 2 per cent target over the next two years though at a slightly slower pace.

Skepticism about that view is likely to grow, however, if Friday’s data and other incoming inflation figures are higher than anticipate­d - and not just from steady inflation hawks like Waller but from others as well, like Atlanta Fed President Raphael Bostic, a voter this year on interest rate policy.

In comments to reporters last week, Bostic said he had already scaled back his expectatio­ns for 2024 from a half-point reduction in the policy rate to a quarter point cut, “and I’m looking sort of later in the year than I might have not otherwise” to approve it.

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A man arranges produce at Best World Supermarke­t in the Mount Pleasant neighbourh­ood of Washington.
Reuters ↑ A man arranges produce at Best World Supermarke­t in the Mount Pleasant neighbourh­ood of Washington.

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