Uncertainty lingers over decision on when to begin cutting interest rates

WASHINGTON (TND) — The Federal Reserve is showing some signs of growing concerns about the rate inflation cooling off and uncertainty about when will be the right time to start cutting interest rates that are taking a toll on consumers that have had to rely on credit cards to make purchases due to higher prices.

This year has brought several inflation readings that were higher than expected, pushing back the timeline for when the Fed might begin cutting its benchmark interest rate that makes it more expensive to borrow money for things like auto loans and credit cards. Having debt be more expensive is meant to cool economic activity as consumers and businesses cannot afford to maintain spending levels or opt to save instead.

April was the first month in 2024 that brought a decline in the consumer price index after data from January to March was unexpectedly high after a steady decline to finish 2023. Even with April’s decline, inflation still sat at 3.4% compared to last year, above the Fed’s goal of 2%. The recent pattern was noted in the meeting and during Fed chairman Jerome Powell’s post-meeting press conference.

“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” a summary of the meeting says.

The Federal Open Markets Committee voted unanimously at the conclusion of their meeting to leave its benchmark interest rate at a range of 5.25% to 5.5%, a 23-year high that has been steady since last July. There are some lingering concerns about events beyond the Fed’s control, like the war in the Middle East, that there is still some upside inflation risk lingering.

Outside factors and hot reports have bolstered some speculation that rate increases could be on the table, and the minutes show “various participants mentioned a willingness to tighten policy further should risks to inflation materialize.” However, Powell and governors have cast skepticism on the idea of the next move from the Fed being a rate increase despite hot data to begin the year.

“While this statement in isolation might sound hawkish, we should remember that the bar for hikes is high. Fed Chair Powell reiterated that ‘it’s unlikely the next policy rate move will be a hike.’ Further, every word in the minutes matters: ‘various’ likely indicates a small number of participants, likely non-voters; ‘willingness’ doesn’t mean ‘desire’; and the necessary condition is persuasive evidence that inflation is accelerating,” said Gregory Daco, chief economist at EY.

Fed officials and economists have warned that getting the last bit of inflation out of the economy would be a bumpy process that could take a while given the economic developments after the pandemic and geopolitical events that once again rattled supply chains and energy markets.

While progress in headline inflation measured in the CPI has been stalled, there are other indications the economy is cooling in a way that may lead to inflation continuing to drop. Last month’s jobs report showed hiring slowed and economists are projecting gross domestic product to slow along with slower gains in wages.

Fed Governor Christopher Waller said in a speech in Washington earlier this week that he’d like to see several more months of positive data before moving forward with a cut, which would indicate the first could come around September.

“I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy. What do I mean by good data? What grade do I need to give future inflation reports? I will keep that to myself for now but let's say that I look forward to the day when I don't have to go out two or three decimal places in the monthly inflation data to find the good news,” Waller said.

Economists are still optimistic about the trendline inflation is taking despite the recent bumps in the road back to 2%.

“We anticipate headline CPI inflation will hover around a 3.5% plateau through the summer while core CPI inflation gently eases below the 3.5% mark. This should translate into a similar plateau for (personal consumption expenditures) inflation around 2.7% while core PCE inflation moves toward 2.5%,” Daco said. “Such a plateau is not so far above the Fed’s 2% target that it would warrant excessively tight monetary policy.”

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