Fed officials consider leaving rates higher for longer

Federal Reserve officials plan to keep interest rates high for an extended period of time after inflation and labor market data came in better than expected in January and February on the back of a strong U.S. economy. It suggests possibility.

“It’s too early to tell whether the recent numbers represent anything more than just an uptick,” Fed Chairman Jerome Powell said at an event Wednesday. “We do not believe it is appropriate to lower the policy rate until we have greater confidence that inflation is sustainably declining towards 2%.”

The consumer price index (CPI) in February exceeded expectations for the second consecutive month, rising 0.4% from the previous month and increasing at an annual rate of 3.2%. Excluding the more unpredictable categories of food and energy, prices rose 3.8% for the year.

Nonfarm payrolls rose by 275,000 in February, another upside surprise despite the unemployment rate rising to 3.9%.

“Recent data on job growth and inflation are better than expected,” Powell said. “The economy added an average of 265,000 jobs per month over three years. [months] Until February, sales were at the highest pace since June of last year. And the high inflation data for January and February exceeded the low readings in the second half of last year. ”

Atlanta Fed President Rafael Bostic echoed that view on Wednesday, suggesting the central bank would cut interest rates only once in the fourth quarter of this year.

“If the economy develops as I expect, GDP will continue to be strong.” [gross domestic product]”Given the unemployment rate, the gradual decline in inflation over the course of the year, I think it would be appropriate to start lowering it at the end of this year, in the fourth quarter,” he said on CNBC. “We need to see where the data is coming from.”

The Fed primarily affects price levels through the labor market, reducing demand for goods by increasing borrowing costs, which can lead to lower wage growth, hiring freezes, and layoffs.

Although the labor market remains strong in absolute terms, it has weakened due to the Fed’s monetary tightening process, with the unemployment rate rising from 3.4% in January 2023 to 3.9% in February. The unemployment rate also fell from 3% to 2.2% in 2022, and the ratio of job openings to unemployed people fell from 2 to 1.4 over roughly the same period.

This is a major advance from the Fed’s perspective.

“The rebalancing of the labor market is evident in data on job turnover, job openings, employer and worker surveys, and the continued slow decline in wage growth,” Powell said Wednesday.

Powell’s comments on Wednesday did not include the impact of profits on recent price increases. soared to an all-time high In the fourth quarter, the U.S. economy continued to see strong output, a phenomenon that has come under increasing scrutiny from policymakers.

A recent report from the Federal Trade Commission (FTC) pointed to expanding margins in the grocery sector and said policymakers should consider it.

“In the first three quarters of 2023, retailer profits increased further, with revenue reaching 7% of total costs. “This calls into question claims that costs are moving in tandem with rising costs,” FTC researchers wrote in March.

Market commentators have noted unusual earnings trends post-pandemic, noting the interplay between supply chain concerns and margin expansion.

UBS economist Paul Donovan said in a commentary in February: “Remembers of supply disruptions are making the case for higher inventory levels, but consumer resistance to price increases and concerns over profit margins will prompt inventory cost discipline.” There is a possibility.”