Fed in a holding pattern as in ation delays approach to any soft landing
Fed is seen holding benchmark interest rate steady at 5.25%-to-5.5% at April 30-May 1 meeting: key judgment in the current policy statement — ination ‘remains elevated’ — may have to remain in place after the pace of price increases accelerated over the
nation showing no recent sign of slowing or narrowing in scope leaves U.S. Federal Reserve policymakers challenged this week over how to characterise 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%-to-5.5% at its April 30-May 1 meeting, and a key judgment in the current policy statement — that ination “remains elevated” — may have to remain in place after the pace of price increases accelerated over the rst three months of the year after steadily slowing through 2023.
Details of the most recent price reports, moreover, showed high ination 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 focussed on as a reason to be wary of cutting interest rates.
Data from March, for example, showed more than half of the items in the personal consumption expenditures (PCE) price index — used by the Fed to set 2%
Iination target — saw ination of more than 3%.
“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% annual pace in March versus 2.5% in February, while the number stripped of volatile food and energy prices was 2.8%, matching February.
“This is very strong data and it is not data that has given them con dence they are meaningfully on way to 2%... The Fed is going to have to wait.”
For ‘greater con dence’
Many analysts still expect ination to move lower over the year, eventually allowing policymakers to call the rst quarter a
“bump” on the path back towards 2% 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 with a press meet by Fed Chair Jerome Powell following.
With no new economic projections due, the policy statement and Mr. Powell’s remarks will anchor whatever guidance may come.
After months that have held hints of economic slowing, including rstquarter economic growth at 1.6% that was the weakest in nearly two years, alongside strong price increases and job growth, there may be little to change ocials’ current strategy of delaying rate cuts until the data show a convincing turn.
Policymaker projections in March signalled three quarter-point rate cuts by the end of the year, with markets geared for the rst in June. Mr. Powell’s last public comments before this week’s meeting suggest outlook has eroded.
“The recent data have clearly not given us greater con dence” that ination will resume its decline, Mr. Powell said in comments to a forum in Washington on April 16. “Right now, given the strength of the labour market and progress on ination 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,” Mr. Feroli wrote, while Mr. Powell is likely to re-emphasise the Fed will delay rate cuts as long as needed but also be ready to move sooner if the data warrant.
Political season
Fed ocials have downplayed the need for another rate increase. The current rate was set in July, a nine-month plateau that already exceeds three of the
ve prior policy cycles, but still short of the 15- and 18month holds just before the global nancial crisis in 2007 and in the late 1990s.
New projections will be issued in June, and Mr. Feroli
said he anticipated Mr. 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 ination that prompted it, has thrown an unexpected wrinkle into what, as of late last year, seemed a coming “soft landing” from high ination.
Unless the data move strongly to show ination 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 Mr. Powell for raising rates when Mr. 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 a§airs division.
After May, the Fed has meetings in June, July, September, November following the election and December. “To preserve reputational capital, June and December are the safest harbours,” he said.
The Fed seemed to be favouring June but “the data ruled that out.”
Details of the most recent price reports, moreover, showed high ination lodged across a wide array of goods and services