Inflation is also rising: The Fed story
The Fed admitted yesterday that Inflation progress is stagnant He also said it would take more time for the Fed to gain the confidence it needs to cut rates.
The Fed’s official statement has expanded to include the statement that “there has been no further progress toward the Committee’s 2% inflation target in recent months.” At the press conference, Federal Reserve Chairman Jerome Powell is even clearer, “ [inflation] Downfall is not guaranteed, but the path forward is certain. ”
It’s been a roller coaster ride for the Fed.Last summer, Fed officials still believed that monetary policy was not restrictive enough. The Fed kept its benchmark federal funds rate unchanged at a range of 5% to 5.25% at its June meeting, but the median forecast indicated officials expected another rate hike last year.
The Fed raised interest rates again in July. Although Fed officials didn’t know it at the time, this was the last rate hike of the cycle. No outlook was released at the meeting, but it became clear at the September meeting that Fed officials still expect one more rate hike. In addition, the September forecast showed that officials expect: fewer cuts The following year, it raised its median forecast for the end of 2024 from 4.6% (100 basis points lower than the forecast for the end of 2023) to 5.1%.
The next set of predictions is Fed aims to shift away from hiking. At its July meeting, the Federal Reserve confirmed it had finished raising interest rates and lowered its forecast for a rate hike by the end of 2024 to 4.6%, the equivalent of three hikes next year.
The false dawn of disinflation
It’s easy to see why the Fed became complacent about inflation late last year.of personal consumption expenditure The PCE price index, which the Fed uses as its official measure of price stability, remained below the Fed’s target for seven months last year. During his last three months, the inflation statistics released by the Department of Commerce’s Bureau of Economic Analysis looked very promising. The annual rate of increase in October was just 0.42%. It then fell by 0.85% in November (later revised down to exactly half) and by 1.5% in December.
core inflation It’s getting a little hotter, but it still looks promising. In October, the annualized increase was 1.8% (later revised to 1.7%), in November he was 0.7% (later revised to 1%), and in December he measured 1.8%. Median PCE inflation also performed well, rising 0.3% month-on-month in October, 0.2% in November, and 0.1% in December.
people like new york times Columnist Paul Krugman has declared that the war on inflation has been won. “Team transition period” I was right all along. Many market observers began warning that the Fed risked causing an unnecessary recession if it did not begin lowering interest rates immediately.
The fight against inflation is over.we won at a small cost pic.twitter.com/opumf3nEvL
— Paul Krugman (@paulkrugman) October 12, 2023
Experts weren’t the only ones who thought inflation had occurred. So did the market. By the end of last year, The swap market was pricing in 6-7 interest rate cuts in 2024., more than double what the Fed expected. Even more cautious analysts had predicted that the Fed would likely cut payments every other meeting, which would result in four cuts.
It became a popular topic of discussion among Wall Street analysts. real interest rate, the interest rate minus the inflation rate. They pointed out that lower inflation means higher real interest rates, and that Fed policy is tightening even if nominal interest rates remain unchanged. They argued that the Fed would need to cut rates several times this year to stabilize real interest rates.
The warning signs were easy to spot, but apparently even easier to ignore. For example, economic growth in the second half of last year was unusually high, suggesting that monetary policy was not as restrictive as Fed officials thought. In fact, the rate of increase in the services-related personal consumption expenditure price index has accelerated, with an annualized rate of 2.3% in October, 3.1% in November, and 3.7% in December. In other words, All disinflation came from the goods side.This is primarily a result of supply chain improvements rather than demand declines.
What will it take for the Fed to pivot again?
Fed officials deserve a certain amount of praise for not getting involved in this issue. Victory over inflation hype. A January statement made clear that cuts were not imminent. The Fed said it would need several more months of good inflation data to be confident that inflation is sustainably falling to 2%.
In the first quarter of this year, the opposite was true. Inflation flared up again in January, but only calmed down a bit in February and March. The Fed’s fear that disinflation in 2023 could prove to be temporary seemed like a very real possibility.
Fed officials still believe the disinflationary trend will return. Chairman Powell said Wednesday that the appropriate policy response is to keep interest rates where they are and wait for more data. But he added that the positive inflation performance would need to continue for much longer to convince officials that the time has come to cut rates.
Federal Reserve Chairman Jerome Powell speaks during a press conference following the conclusion of the Federal Open Market Committee (FOMC) in Washington, DC on May 1, 2024 (SAUL LOEB/AFP via Getty Images)
The Fed did not issue a new outlook. They won’t be seen until the June meeting.But it’s clear The median forecast is that there will be no further three rate cuts this year.. Maybe there will be up to two, or maybe just one.
A wait-and-see approach may be wise, but it is not without risks. Just as real interest rates rose as inflation fell last year, this year’s acceleration in inflation means real interest rates are falling. Monetary policy has been accommodating even though the Fed has kept interest rates on hold.
What will it take to change the Fed’s overarching view that monetary policy is sufficiently restrictive and that inflation is trending down? Perhaps four more quarters of strong inflation will do the trick. But that means the Fed probably won’t pivot to raising rates until next year. September meeting at the earliest.
But anyone looking at the data should be able to predict the pivot sooner than that. If inflation remains above target in April, May, and June, the Fed is likely to ease its rate cuts. When it gets as hot as January, The Fed will begin preparing the market for interest rate hikes..
Chairman Powell said on Wednesday that he thought a rate hike was unlikely. Data from the coming months could change that view.
