Fed Chief Not Ready to Lower Interest Rate Until Inflation is Under Control

Federal Reserve Chair Jerome Powell is unsure if the back-to-back, hotter-than-expected inflation readings are something more than just a bump in the road.

In prepared remarks at Stanford University on Apr. 3, the central bank chief reiterated that it would be inappropriate for monetary policymakers to cut interest rates.

“On inflation, it is too soon to say whether the recent readings represent more than just a bump,” Mr. Powell stated. “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent.”

Mr. Powell noted that the policy-making Federal Open Market Committee (FOMC) maintains the latitude of being patient and allowing “incoming data to guide our decisions on policy.”

While the various inflation headline inflation metrics topped market expectations, the Fed chair conceded that the latest information does not “material change the overall picture.”

Investors are pricing in a June rate cut, but Mr. Powell repeated that decisions are made on a “meeting by meeting” basis. At the same time, he said that cuts to the benchmark federal funds rate are “likely to be appropriate at some point this year” as he does not believe “inflation is reversing higher.”

According to the CME Fed Watch Tool, traders signal that there is a 62 percent chance of the first rate cut happening in June.

However, because of the revival of inflation concerns, there has been uncertainty in the broader financial markets, with U.S. Treasury yields climbing again.

The benchmark 10-year yield is above 4.35 percent, while the two-year yield sits at around 4.68 percent.

Mr. Powell’s comments come soon after the updated March Summary of Economic Projections (SEP) shows Fed officials still expect three quarter-point rate cuts this year as the median policy rate slides to 4.6 percent by the year’s end.

What Other Fed Officials Say

Over the past week, there have been mixed opinions emanating from Fed officials.

Federal Reserve Bank of Cleveland President Loretta Mester told the National Association for Business Economics in Cleveland on Apr. 2 that she would not rule out a 25-basis-point decrease to the policy rate in June. She still anticipates three cuts this year.

“If the economy evolves as expected, then, in my view, it will be appropriate for the FOMC to begin reducing the fed funds rate later this year,” Ms. Mester said in a speech.

Ms. Mester conceded it would be a “close call” on whether fewer rate cuts are required.

At an event in Las Vegas, San Francisco Fed President Mary Daly admitted that bringing inflation in line with the central bank’s 2 percent target is a “slow” and “bumpy” process. Since the economy and labor market are performing better than expected, “there’s really no urgency to adjust the rate.”

Ms. Daly added there is a “real risk” of pivoting too soon and installing a “toxic tax” of above-trend inflation.

Raphael Bostic, who heads the Atlanta Fed, told CNBC on Apr. 3 that he sees only a single rate cut this year, which will occur in the fourth quarter. Ultimately, it will depend on the data, he noted.

“I think it would be appropriate for us to start moving down at the end of this year, the fourth quarter,” Mr. Bostic said.

“The road is going to be bumpy, and I think if you’ve looked over the last several months, inflation hasn’t moved very much relative to where we were at the end of 2023. There are some secondary measures in the inflation numbers that have gotten me a bit concerned that things may move even slower.”

The State of Inflation

Last month, the annual inflation rate rose to 3.2 percent, up from 3.1 percent in January and higher than economists’ expectations of 3.1 percent.

The Producer Price Index (PPI), which gauges the prices businesses pay, climbed unexpectedly 0.6 percent in February, the biggest monthly increase since August. In addition, this surpassed the consensus estimate of 0.3 percent.

In February, the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, rose to 2.5 percent. Core PCE, which excludes the volatile food and energy components, dipped to 2.8 percent, as expected.

Looking ahead, the Cleveland Fed’s Inflation Nowcasting model suggests that the March Consumer Price Index (CPI) will rise to 3.4 percent. The PCE is seen edging up to 2.6 percent.

As Mr. Bostic mentioned, various non-headline metrics are proving to be cause for concern.

The Atlanta Fed’s gauge of 12-month “sticky” inflation was well above 4 percent.

The widely watched supercore inflation, which gauges services excluding housing, rose 0.5 percent monthly and was unchanged at 4.3 percent year over year. However, on a three-month annualized basis, supercore inflation advanced to 6.9 percent. The six-month metric clocked in at 5.6 percent, up from 2.8 percent in August 2023.

SEP data suggest the Fed does not expect PCE to ease to 2 percent until 2026.

The next two-day FOMC policy meeting is scheduled for Apr. 30 and May 1.

From The Epoch Times

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