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Fed officials stick to Powell’s bullish script for longer as key inflation reading approaches
Jay Powell’s colleagues spent the last week supporting the central bank chairman’s stance hit home in his last press conference: Interest rates will stay higher for longer.
In a series of speeches and interviews, several Fed officials reinforced that they will adopt a careful and measured approach to monetary policy as they digest hotter-than-expected inflation at the beginning of this year and assess whether this situation changes in the coming years. months.
New York Fed President John Williams said “politics is in a very good place 1715545205.” Minneapolis Fed President Neel Kashkari added: “I think it’s much more likely that we’re going to be sitting here longer than we expect.” Chicago Fed President Austan Goolsbee noted, “I think we should wait now.”
The comments came after the Fed decided on May 1 to keep its benchmark interest rate in a range of 5.25% to 5.50%, the highest level in 23 years.
The Fed’s interest rate setting committee said in its latest policy statement that “in recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”
The next opportunity for more clarity comes this week with the first inflation reading for the start of the second quarter on Wednesday via the Consumer Price Index (CPI).
April’s CPI is expected to improve, dropping to 3.6% from 3.8% in March on a “core” basis, which excludes volatility in food and energy prices.
“They may need several months of inflation showing that it is coming back down before they signal that … they have the confidence to cut,” said Esther George, former president of the Kansas City Fed.
George said he believes the Fed will need three months of encouraging data. If that happens, the first rate cut could come in September – even with presidential elections looming in November. Two rate cuts could still come this year, she added, or no rate cuts at all.
If inflation news improves soon, it will reignite talk about the timing of a first cut, said former St. Louis Fed President James Bullard.
He said he believed a first cut in December was possible, while also arguing that the Fed could justify a cut now as long as the central bank promised nothing more.
‘You have to live with this decision’
Both George and Bullard experienced another election year in 2016, when all eyes were on the Fed as it pondered whether to take action.
This year, the question was when the Fed would raise rates after years of loose monetary policy needed to stimulate an economy hurt by the 2008 financial crisis.
The story continues
Federal Reserve Bank Chairman Jerome Powell speaking at a press conference on May 1. (Chip Somodevilla/Getty Images) (Chip Somodevilla via Getty Images)
He waited throughout 2016 for the greater confidence needed to raise rates and only did so at the last meeting of the year, in December, after Donald Trump was elected president.
The tightening cycle that began in 2016 was done on the assumption that inflation would return to the Fed’s 2% target, Bullard said, rather than waiting for absolute certainty.
“It was anticipatory,” he said, and it took until 2021 for inflation to really rise.
“I think we raised the policy rate quite a bit in an environment where inflation was actually below target, and I think maybe it’s not seen as the best policy in hindsight,” he added.
George, who at the time was on the Fed’s interest rate-setting committee, said the central bank wanted to be really confident that raising rates was the right thing to do.
Esther George, left, when she was president of the Kansas City Fed. She is with New York Fed President John Williams in the center and Fed Chairman Jerome Powell in 2018. (REUTERS/Ann Saphir) (REUTERS/Reuters)
“I think both the uncertainty and the need for confidence in both periods were kind of a rallying cry for the FOMC,” she said. “Remember, for the U.S. economy, the largest economy in the world, the American public, you are not going to play fast and loose with risk.”
The Fed, she said, did not use the election as motivation for any decisions.
“One thing I always had in mind is that you have to live with this decision long after an election. You’re trying to see what’s in the long-term interest of the committee’s decision-making. oh, we would like to do it now to avoid the election.”
Not all Fed officials are optimistic that rate cuts will still happen this year. Fed Governor Michelle Bowman said Friday that she does not expect any cuts this year due to the direction of inflation.
Kashkari also did not rule out an increase if inflation stays close to 3%.
Goolsbee, who was dovish in his comments earlier this year, made it clear on Friday that three months of hotter inflation at the start of the year had changed his view that inflation was clearly on track for 2%.
Strong consumer spending and job growth are leading you to question whether the economy is tipping toward overheating and whether that will be lasting or just a brief moment.
“In my opinion, there isn’t much evidence that inflation is stuck at 3%,” Goolsbee said.
“We’ve hit that hurdle and now, I guess, now we’re going to wait.”
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