The Fed’s stance on keeping rates high for longer is unlikely to change after a new reading of the central bank’s favorite inflation gauge showed prices were still stubborn.
The so-called “core” Personal Consumption Expenditures Index, which excludes volatile food and energy prices over which the Fed has no control, rose 2.8% in April from the previous year. That annual increase was unchanged from March and in line with expectations.
But the month-on-month increase in April showed some progress, clocking in at 0.2%. That was down a tenth of a percent from March levels and represented the slowest gain for the index so far in 2024.
“What we ended up with was a mix,” HSBC U.S. economist Ryan Wang said on Yahoo Finance Live.
The Fed “will be happy” with the month-over-month easing, but the flat year-over-year figure “doesn’t really indicate much progress on disinflation this year.”
So the new inflation numbers are unlikely to change the caution expressed by numerous Fed officials in the weeks since the last Fed meeting on May 1.
Cuts will happen “at some point,” New York Fed President John Williams said Thursday. But “I don’t feel any urgency.”
In addition, Fed Chairman Jerome Powell has made clear that he thinks the Fed will need more than a quarter’s worth of data to assess whether inflation is steadily declining toward the central bank’s 2% target.
Fed Governor Chris Waller appears to want more, noting that he would like to see “several” months of data. That implies that it will take more than three inflation reports before the Fed is confident about a rate cut.
Hopes for an interest rate cut this year are diminishing. Investors have now reduced the chances of a possible first rate cut in September, with a nearly 50% chance that the Fed will not cut rates that month. The chance of a cut in November is 46%.
HSBC’s Wang said in September he still expects a rate cut in 2024. EY chief economist Gregory Daco said in a note on Friday that “we continue to project two rate cuts in July and November this year to ease inflation and ease labor market conditions, even as the risks of a delayed start in September increase.”
The Fed decided at its last meeting to keep its benchmark interest rate at a 23-year high, within a range of 5.25%-5.50%.
Minutes from the May policy meeting released last week indicated some policymakers discussed their willingness to raise rates if necessary.
Minneapolis Fed Chairman Neel Kashkari said earlier this week that he would not rule out a rate hike. although it is likely that the Fed can keep rates stable for an “extended” period of time, pending a decline in inflation.
“We can sit here for as long as necessary until we become convinced that inflation will sustainably return to our 2% target,” he said.
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