Fed must thread needle between ‘restrictive’ policy and strong data
Federal Reserve chair Jerome Powell and vice-chair Philip Jefferson have been trying to reconcile a gravity-defying economy with their assessment that monetary policy is “restrictive” and inflation is likely on its way down.
Both of those ideas have been called into question by job growth, retail spending, inflation and other data that continue to challenge the Fed’s expectation that the economy was gliding towards lower demand, slower growth and inflation near the central bank’s 2% target.
On Tuesday, Jefferson made remarks to a Fed research conference that skirted any mention of interest rate cuts. He said the US central bank was ready to keep its tight monetary policy in place if inflation fails to slow.
His remarks excluded key phrases about gaining “confidence” in lower inflation and cutting rates, but noted the Fed was facing a strong economy and little recent progress on the pace of price increases.
Powell was due to speak later in the day.
Just over five weeks ago he told a US Senate panel the Fed was “not far” from gaining the confidence in falling inflation needed to cut interest rates, but policymakers, investors and outside analysts have lost a bit of faith in that outlook since.
In the days just after Powell’s congressional testimony, futures contracts tied to the Fed’s policy rate reflected an initial quarterpercentage-point rate cut as likely to occur at the central bank’s June 11-12 meeting, with two more reductions in borrowing costs by the end of 2024.
Now the first cut is seen in September, and the odds of a second cut were falling after the US government reported on Monday a 0.7% rise in retail sales in March, exceeding economists’ expectations.
Economists at Goldman Sachs raised their estimates of first-quarter economic growth to a 3.1% annual rate, from 2.5%, after that report, while others saw it as another reason for the Fed to keep its benchmark policy rate unchanged.
“This is another clear sign of the resilience of the US consumer, which we think will keep growth strong this year and adds to the risks that the Federal Reserve will delay its first rate cut beyond June,” Michael Pearce, deputy chief US economist at Oxford Economics, wrote in a note.
“We still expect Fed officials to lower rates later this year, but that will be justified by renewed signs of moderating inflation later this year, rather than fears the economy is about to weaken dramatically.”
Officials at the Fed’s March 19-20 meeting said they still expected to cut the policy rate by three-quarters of a percentage point by the end of 2024. Powell at the time said disappointing inflation data in January and February “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road towards 2%”.
Yet the bumps continue, with some officials at the March meeting worried that policy was not having the sort of impact that would be typically expected from the highest interest rates in a quarter of a century.
Data since then has shown 303,000 jobs were added in March, the pace of consumer price increases accelerated, and even low-income households continued to spend. The strength of the economy, policymakers suggest, is one reason they could wait to cut rates and be sure inflation will resume its decline.
New data on the personal consumption expenditures price index, which the Fed uses to set its inflation target, will be released next week, and could show some slight improvement for policymakers to take into their April 30 to May 1 meeting.
But even optimists are not expecting a big improvement.
“This question of the last mile is a little harder,” with progress slowing as the Fed gets closer to its inflation target, Chicago Fed president Austan Goolsbee said on Friday. “If we see that inflation is on this path back down to 2%, then do we want to remain as restrictive as we are right now for a prolonged period? If inflation doesn’t come down. That answers it for us.”