Tuesday, 28 May 2024

Federal Reserve: New data does not support “confidence” in declining inflation


Minutes of the Federal Reserve’s March 19-20 meeting showed that Fed officials last month were concerned about the possibility of faltering progress in reducing inflation and the need to tighten monetary policy for a longer period in order to curb the pace of price increases.

However, they maintained a basic view of three interest rate cuts in 2024.

According to Reuters, the minutes of the meeting stated, “Participants generally indicated their uncertainty about the continuation of high inflation and expressed the view that the recent data did not strengthen their confidence in the continued decline of inflation to two percent,” a feeling that may have been reinforced by the data issued on Sunday. Wednesday that showed another sudden jump in inflation.

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Federal Reserve officials are debating whether the greater risk is that monetary tightening continues for too long, or that the Federal Reserve resorts to monetary easing too soon and is unable to return inflation to its 2 percent target.

Some officials continued to say that important items such as housing price inflation will begin to slow, with a number of them declaring that increases in productivity may allow growth to remain strong and inflation to continue to decline.

But the minutes reflect general concern about the state of the inflation battle, which seemed easy to achieve at the beginning of the year.

“Participants noted indicators indicating economic momentum and disappointing inflation data in the past few months,” the minutes said, emphasizing that they would need greater confidence in the continued decline of inflation before cutting interest rates.

The meeting minutes said that “some” officials said there was a risk that Fed policy would be “less tight than desired, which could boost demand and put upward pressure on inflation,” a logic that could be used to defend another rate hike.

The Federal Reserve has raised interest rates by 5.25 percentage points since March 2022 to combat rising inflation.

If Wednesday’s CPI data had any impact, it further undermined any certainty about lower inflation.

The US Labor Department said the consumer price index accelerated to 3.5% year-on-year in March from 3.2% in February, and a separate “core” measure that excludes food and energy prices held steady at 3.8%.

Policymakers at the Federal Reserve are discussing when to reduce the benchmark overnight interest rate from the current range of 5.25 to 5.50%, where it has remained in this framework since last July.

Federal Reserve officials meet again on April 30 and May 1.

After the release of the latest consumer price index data, investors postponed their bets on the timing of the first interest rate cut to September instead of June.