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The Federal Reserve meets on Tuesday, and with inflation still sluggish, the central bank is widely expected to keep interest rates at current levels.
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Legendary baseball coach and player Frank Robinson famously said, “In horseshoes and hand grenades, close calls matter,” and the Federal Reserve follows this lesson.
After lowering its recommended inflation gauge to December 2023 from just over 7% in June 2022 (its highest level since the early 1980s), Current Reading At 2.7%, one would think the central bank would breathe a sigh of relief.
But the Fed will likely do something quite different at its two-day June monetary policy meeting that begins on Tuesday. Officials are almost certain to keep interest rates on hold despite the May Consumer Price Index report, due to be released at 8:30 a.m. ET on Wednesday, just hours before the Fed’s decision.
“Of course we’re not happy with 3 percent inflation,” Fed Chairman Jerome Powell said. He told reporters “Three percent is hardly the word to describe it,” he added after last month’s policy meeting.
Powell and his Fed colleagues will stick to the 2% target and will not consider cutting rates until they are confident that inflation is on a sustainable path to that level — in contrast to the recent attempts by many foreign central banks to cut rates. Process started.
But the Fed has good reason to be stubborn.
Former Fed Chairman Ben Bernanke even said, “Monetary policy is 98% words and 2% actions.” In other words, whether the Fed can achieve a 2% inflation rate depends mainly on A by-product of public belief It will happen.
If people expect prices to rise 3%, it would be foolish for companies not to give the price increases they’re already expecting — workers will likely demand an equivalent wage increase to tolerate the price increases, which makes it much harder for the Fed to suppress inflation further.
3% inflation expectations are not just a hypothesis. From the New York Fed, It shows that people expect prices to rise by around 3% over the next year and over the next few years.
If Fed officials indulge in these expectations, they will likely lose their ability to convince anyone that they mean business about wanting 2% inflation, which is why it is so important that the central bank insists on 2%.
“By announcing a clear inflation target and then achieving inflation in line with that target, a central bank can earn the public’s trust,” New York Fed President John Williams said in a recent speech. “That helps anchor expectations and, in turn, contributes to low and stable inflation.”
It would be a different story if the latest inflation reading fell to 2.7 percent and showed signs of further progress, but that has not been the case in recent months.
The personal consumption expenditures price index was unchanged in April from March, when prices rose. Accelerated This rose to 2.7% from 2.5% in February.
Moreover, inflation figures for the first quarter of this year put the country’s annual inflation rate at 3.4%.
“Fortunately, this figure is far from the 7.1% headline inflation rate observed in June 2022, but it is a reminder that the work is not done,” Richmond Fed President Tom Barkin said in a speech last month.
The central bank’s concerns will not be allayed by a measure of so-called “core” inflation, which excludes volatile items such as food and energy, which rose at an annualized rate of 3.7% in the first three months of the year, well above its average in the second half of last year.
While the CPI is not the Fed’s target inflation measure, the central bank is not ignoring it.
That’s because it tells an underlying story about inflation weighing on Americans at undesirable levels.But it was good news for Fed officials that inflation, as measured by the Consumer Price Index, fell to 3.4% in April from 3.5% in March.
But Fed Governor Christopher Waller said last month that “progress has been very gradual and my view remains that we need to see further evidence that inflation is moderating before supporting any further easing of monetary policy.”
