Written by Howard Schneider
WASHINGTON (Reuters) – U.S. Federal Reserve officials last year began steering the world toward a possible interest rate cut in 2024, but months of lower inflation remain the central bank’s target. %, evidence that policy is keeping inflation in check. The economy is still too hot.
Since then, those downward trends have been reversed in an economy that continues to grow above trend, creating enough jobs to keep unemployment at what many consider unsustainable levels and creating enough jobs for Fed officials. At least four of the people are pushing the core of the vote. He has become more skeptical about monetary policy.
If this statistic does not soon resume the trend that seemed to be developing last year, that group could widen and further undermine already weakened expectations for rate cuts.
“I think that’s what gave the Fed pause, because inflation wasn’t going down month-over-month, and when you look at the six-month change, you started to see that it was trending up,” Karen Dynan said. ” he said. , Professor of Economics at Harvard University and Nonresident Senior Fellow at the Peterson Institute for International Economics.
Fed officials may base their argument for continued inflation on “special stories” about housing and other parts of the economy, but they “rely on a slew of special stories leading the way.” “At times, it’s not a comfortable place to be,” he said. Dinant said he expects the central bank to remain largely passive this year, likely approving only one quarter-point rate cut.
That’s well below the three-quarter percentage point rate cut that Fed officials predicted last month, an outlook broadly shared by investors. But if this year started with expectations for a rate cut sooner or 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 expressed detailed concerns about the path of inflation, and the consensus-oriented organization Among them, this is a considerable group that recognizes its symbolic weight. The onset of policy easing will have an impact on markets and, in a presidential election year, on the broader public.
“No Rush”
The March consumer price index (CPI), which will be released on Wednesday, is important in this regard.
Richmond Fed President Thomas Barkin told Reuters last week that after better-than-expected data in January and February, another month of disappointing data could change the situation dramatically. Minutes from the March meeting will also be released on the same day, potentially detailing new policy divisions.
“I don’t think one month will make that much of a difference,” said Barkin, one of five regional bank presidents who will vote on interest rate policy this year. But “when you have another month like January or February, it goes in a completely different direction in terms of how far forward you are.”
The fact that half of the items in the CPI are still seeing price increases of more than 3% is “difficult to reconcile with the progress we want to make” towards the 2% target.
The annual six-month rate of change in the CPI, which excludes food and energy prices – considered a reliable indicator of underlying inflation – has risen steadily from 3.08% in November last year to 3.85% in February.
The upturn, also seen in the measure the Fed uses for its inflation targeting, comes after much of last year, when policymakers began laying the groundwork to lower the benchmark overnight benchmark rate from its current 5.25% to 5.50%. This interrupted the steady continuation of observations throughout the period. This is the highest level since July last year.
“It looks like something is a given, and that is the pace of the economy,” Fed Director Christopher Waller said in a speech in November, saying it could be months before the Fed is able to cut interest rates because of falling inflation. Stated. .
However, since Waller’s remarks, the economy has continued to grow above trend, and employment growth, which had appeared to be slowing, has started to pick up. While neither is inflation per se, it doesn’t necessarily mean the economy needs lower interest rates, effectively putting the countdown to rate cuts that Waller helped start on hold.
“There is no rush to cut interest rates,” Waller said in a speech last month. “It is prudent to maintain policy rates at their current restrictive stance.” . ”
“Advanced” data dependencies
Fed Governor Michelle Bowman, perhaps the most ardent inflation hawk, went further, saying last week that although it was not her base case, she could not rule out a rate hike.
Meanwhile, Atlanta Fed President Rafael Bostic said after the March policy meeting that he had lowered his outlook for rate cuts from two cuts in the second half of 2024 to one at the end of the year.
The view of policymakers with voting rights is consistent with the general subdued expectations of rate cuts among officials. Fed policymakers’ forecasts released in March showed the highest and lowest rates, with the median forecast for three rate cuts this year unchanged, but the most dovish policymakers all raising their forecasts. The overall outlook and “central tendency” have shrunk except for three outlooks. Regarding policy interest rates.
Even more skeptical Fed officials say the baseline remains that if inflation slows and increases, interest rates will fall.
But Krishna Guha, vice chairman of Evercore ISI, said data from the next month or two will help determine whether the Fed gains the confidence it needs to cut rates or loses confidence that inflation is under control. He said he will play a “big role.”
“The hurdles are not too difficult and there is a good chance that we will have enough data” for the Fed to cut interest rates in June, he said, but “the Fed has reached a stage where it becomes increasingly reliant on data points. “There is,” he said.
(Reporting by Howard Schneider; Editing by Dan Barnes and Paul Simao)