Oman Daily Observer

Fed’s rate-cut confidence wobbles as inflation data misbehaves

- — Reuters

As Federal Reserve officials last year started steering the world towards possible interest rate cuts in 2024, they took heart in data showing inflation over many months had collapsed to the US central bank’s 2 per cent target, evidence their policies were curbing a still toohot economy.

Since then, those downward sloping lines have reversed in an economy that continues to grow above trend, produce enough jobs to keep unemployme­nt at what many think is an unsustaina­bly low level, and have pushed a core of at least four of the 12 Fed officials voting on monetary policy into a skeptical stance.

If the data doesn’t soon resume the trend that appeared to be developing last year, that group could grow and further undermine already weakening rate-cut expectatio­ns.

“When you start to see month after month of inflation not falling, and tipping up if you look at the six-month changes, I think that has given the Fed pause... There has been a change in sentiment,” said Karen Dynan, a Harvard University economics professor.

While Fed officials might sketch out arguments for continued inflation declines based on “special stories” about housing or other parts of the economy, “when you rely on a whole bunch of special stories breaking your way, it is not a comfortabl­e place,” said Dynan, who sees the central bank remaining largely on the sidelines this year, perhaps approving only a single quarterper­centage-point cut in rates.

That’s well short of the three quarter-percentage-point cuts Fed officials projected last month, an outlook largely shared by investors. But if the year began with rate cuts expected sooner than later, the burden of proof appears to have shifted.

Since the March 19-20 policy meeting, members of the Fed’s rate-setting committee, including two governors and two regional reserve bank presidents, have detailed concerns about the inflation path, a sizeable group in a consensus-minded organisati­on that realises the symbolic weight the start of policy easing will have on markets and, in a presidenti­al election year, the broader public.

The release on Wednesday of the consumer price index (CPI) for March looms large in that regard. Richmond Fed President Thomas Barkin said last week that another month of disappoint­ing data after higher-than-expected readings in January and February could change things significan­tly.

The minutes of the March meeting will also be released the same day, possibly detailing emerging policy divisions.

“I don’t think any one month should make that much of a difference,” said Barkin, one of the five regional bank presidents with a vote this year on rates policy.

But “if you get another month that looks like January or February, that takes you in a very different direction in terms of how forward-leaning you are.”

 ?? — Reuters ?? A person shops at a Trader Joe’s grocery store in the Manhattan borough of New York City, New York.
— Reuters A person shops at a Trader Joe’s grocery store in the Manhattan borough of New York City, New York.

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