The US Federal Reserve’s most closely watched inflation measure remained stubborn in March, the latest evidence that price increases are not fading as quickly as policymakers would like, and another reason that interest rates may stay higher for longer.
Investors came into 2024 hopeful that Fed officials would cut rates substantially, but those hopes have been fading as inflation has shown much more staying power than expected. Wall Street increasingly sees lower rates coming much later in the year, if the Fed manages to cut them at all.
The latest personal consumption expenditures index reading could keep the Fed on a cautious path as it considers when to lower borrowing costs.
The overall inflation index rose 2.7 per cent in the year through March, up from 2.5 per cent in February and slightly more than economists had expected.
Fed officials typically keep a close eye on a measure that strips out food and fuel costs, both of which are volatile, to get a sense of the underlying inflation trend. That “core” measure increased 2.8 per cent on an annual basis, in line with its February reading.
Inflation was coming down steadily in late 2023, but in recent months progress has stalled. That has left policymakers reassessing how soon and how much they might be able to cut borrowing costs. Fed chairman Jerome Powell signalled last week that central bankers were not seeing the progress they were hoping to witness before lowering rates.
If inflation continues to hover above the Fed’s 2 per cent target, it could prod officials to keep interest rates high for an extended time. Policymakers raised interest rates to 5.33 per cent between March 2022 and last summer, and have held them at that level since. They think that is high enough to eventually weigh on the economy – in economics parlance, it is “restrictive”.
But some economists have begun to question just how restrictive it is, because growth has remained solid and hiring rapid even after months of relatively high rates.
Data released on April 26 showed that momentum continued in March: Consumer spending rose 0.8 per cent for the second consecutive month, ahead of forecasters’ expectations. Americans’ after-tax income continued to rise faster than prices.
Given the momentum, some economists are wondering if Fed officials could begin to contemplate raising rates again.
Ms Michelle Bowman, a member of the Fed’s board of governors, has already said that while it was not her “baseline outlook”, she saw “the risk that at a future meeting we may need to increase the policy rate further”.
For now, though, markets have simply pushed back their expectations for rate cuts. Investors are betting that the Fed might make its first move in September or later, based on market pricing, though a growing share thinks that it may not manage to cut rates at all in 2024. NYTIMES
