Any soft landing is given in a holding pattern as inflation lags

Eggs for sale at a grocery store in Washington, DC on January 19, 2023. The US central bank’s accommodative inflation accelerated in March, according to a statement from the Commerce Department on April 26, 2024. The Personal Consumption Expenditures (PCE) price index rose at an annualized rate of 2.7% in March, up 0.2 percentage points. file | Image Credit: AFP

With inflation showing no recent sign of slowing or narrowing the range, US Federal Reserve policymakers were challenged this week on how to frame their next steps even as the countdown to a contentious US presidential election continues.

The Federal Reserve Board (Fed), at its April 30-May 1 meeting, held its benchmark interest rate steady at 5.25%-to-5.5% and the key verdict in the current policy statement – that inflation is “high” – will slow steadily through 2023 in the first three months of the year. After increasing the pace of price hikes may have to remain in place.

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Details of recent price reports, moreover, showed higher inflation across a wide range of goods and services, a focus of current voters on interest rate policy, including Atlanta Fed President Raphael Bostick and Richmond Fed President Thomas Barkin. Beware of interest rate cuts.

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For example, March’s data showed more than half of the items in the personal consumption expenditures price index — which the Fed uses to set its 2% inflation target — saw inflation above 3%, a higher than normal share before. the plague

“The Fed has simply run into a brick wall,” Citi Global Chief Economist Nathan Sheets said after data released on April 26 showed that the personal consumption expenditures (PCE) index rose at a 2.7% annual pace in March and 2.5% in February. Stripped of volatile food and energy prices, the number was 2.8%, matching February. “This is very strong data and not data that has given them any confidence that they are meaningfully on their way to 2% … The Fed will simply have to wait.”

Finding ‘Great Confidence’

Many analysts still expect inflation to ease during the year, eventually allowing policymakers to return to 2% in what policymakers call a “bump” in the first quarter and continue with the rate cuts they have been preparing since late last year.

But progress may be slow, and investors have already pushed their outlook for an early Fed rate cut to September. That’s in the thick of a US presidential election, where the state of the economy may be a central issue — and Fed decisions will inevitably be parsed through a political lens.

The Fed’s next policy decision will be released on May 1 at 2:00 p.m. EDT (1800 GMT) with Fed Chairman Jerome Powell holding a press conference at 2:30 p.m. (1830 GMT).

Because of any new economic projections, the policy statement and Mr. Powell’s remarks could provide any guidance.

After months of holding signs of an economic slowdown, including first-quarter economic growth of 1.6%, the weakest in nearly two years, along with strong price increases and job growth, there may be little to change the authorities’ current strategy of delaying rate cuts. Until the data shows a convincing turnaround.

Policymaker projections in March indicated three quarter-point rate cuts by the end of the year, with markets gearing up for the first in June. Mr Powell’s last public comments before this week’s meeting suggest the vision is doomed.

“The latest data clearly doesn’t give us much confidence” that inflation will resume its decline, Mr. Powell said in comments to a forum in Washington on April 16. “Right now, given the strength of the labor market and the progress on inflation, it is appropriate for restrictive policy to allow further time to work and allow for data and evolving outlook guidance. For us.”

That general message is likely to be repeated, JPMorgan economist Michael Ferroli said.

“The post-meeting statement will be slightly different from the one released after the previous meeting in March,” Mr. Ferroli wrote, however, that Mr. Powell is likely to reiterate that the Fed will delay rate cuts as long as necessary but be prepared to move quickly if the data warrant.

A political season

Fed officials have played down the need for another rate hike. The current rate, set in July, is a nine-month plateau that has already been exceeded in three of the five previous policy cycles, but is still shorter than the 15- and 18-month holds held before the global financial crisis in 2007 and in the late 1990s.

Mr Ferroli said he expected new projections would be issued in June and Mr Powell would “not yet defend the March dot plot as a relevant guide to the policy outlook”.

In fact investors now see just one cut this year, currently expected in September.

The delay, and the sticky inflation it prompted, threw an unexpected wrinkle into the “soft landing” that comes from high inflation at the end of last year. That cheered Fed officials and set the stage for President Joe Biden to craft a campaign about weak inflation, even lower unemployment and falling interest rates for good measure.

Unless data moves strongly to show that inflation is falling faster or the economy is weakening, some would prefer to avoid the Fed’s September cuts under the political microscope — especially as Mr. Trump, the Republican nominee, raises rates. Mr Trump was the President.

Even if their motivations are data-driven and apolitical, the optics could argue for avoiding any decisions in the fall, said Vincent Reinhart, chief economist at Dreyfuss & Mellon and former head of the Fed’s monetary affairs division.

After May, the Fed has meetings in June, July, September, November after the election and in December. “To preserve your reputational capital, June and December are safe harbors,” Mr. Reinhart said.

The Fed is leaning toward June, he said. But “the data bear that out.”