Reprinted from: Jinshi Data
04/16 21:41
Fed Chairman Jerome Powell’s speech later this week will be his last public remarks before the Fed’s next meeting, where he is likely to try to reconcile a bucking U.S. economy with officials’ assessment that monetary policy is “restrictive” and that inflation may be falling. Powell will participate in a question-and-answer session at 1:15 p.m. the following day.
In recent times, both of these Fed ideas have been questioned by non-farm, "horror data", inflation and other data, which continue to challenge the Fed's expectations. At the beginning of this year, the Fed still believed that the economy was sliding towards a target of declining demand, slowing growth and price increases close to 2%.
Just five weeks ago, Powell told a U.S. Senate committee that the Fed was “not far” from gaining confidence that inflation would fall needed to cut rates, but policymakers, investors and outside analysts have since begun to lose some confidence in that prospect.
In the days after Powell’s testimony before Congress, futures contracts tied to the Fed’s policy rate reflected the possibility of an initial quarter-point rate cut at the Fed’s June 11-12 meeting, with two more cuts by the end of 2024.
Data released on Monday showed that retail sales rose 0.7% in March, beating market expectations. After the report was released, economists raised their forecast for annual growth in the U.S. economy in the first quarter to 3.1% from 2.5%, and some saw it as another reason for the Federal Reserve to keep its benchmark policy rate unchanged. Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a report:
“This is another clear sign of the resilience of the U.S. consumer, which we believe will keep economic growth strong this year, and increases the risk that the Fed will delay its first rate cut beyond June. We still expect Fed officials to cut rates later this year, but this is because inflation will slow later this year rather than because the Fed is concerned that the economy will weaken significantly.”
'Patience' may still be the Fed's watchword
When inflation was falling rapidly last year, Powell was reluctant to declare the battle against inflation won, although the Fed did say a range of 5.25% to 5.50% was the maximum level needed for the policy rate and set the stage for rate cuts that began this year.
Fed officials said at their March 19-20 meeting that they still expect to cut the policy rate by 75 basis points by the end of 2024. Powell said at the time that disappointing inflation data in January and February "doesn't really change the big picture, which is that inflation is moving toward 2% on a sometimes bumpy path."
Yet the bumps have continued, to the point that at the March meeting some officials worried that the tightest monetary policy in a quarter-century was not having the impact that had been hoped for.
Data since then have shown a sharp increase of 303,000 nonfarm payrolls in March, a faster pace of consumer price increases and even low-income households continuing to spend.
Policymakers say the strong economy is one reason they can wait to cut rates and be assured that inflation will resume falling.
The PCE price index, which the Fed uses to set its inflation target, will be released next week and could show a slight improvement for policymakers at their April 30-May 1 meeting. But even optimists don’t expect a big improvement in the data. Chicago Fed President Goolsbee said on Friday:
“The last mile is a little bit tricky, and as the Fed gets closer to its inflation target, progress is slowing. If inflation doesn’t come down, we could be stuck with the restrictions we have now for a long time.”
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