Investors are abandoning dreams of an imminent rate cut as inflation remains persistent, a problem that could prompt Federal Reserve policymakers to keep borrowing costs high for the long term.
The latest readings of the Fed’s most-watched inflation measure, released on Friday, showed that price rises were well ahead of the Fed’s 2 percent target.
The personal consumption expenditure index rose 2.7 percent in March from a year earlier, up from 2.5 percent in February. And after stripping out volatile food and fuel prices to get a clear read of price trends, inflation remained steady at 2.8 percent on an annual basis.
The report was just the latest sign that, after several months of steady improvement in 2023, progress in reducing inflation in 2024 is stalling. And that unexpected hurdle has made policymakers, economists and investors question how quickly and how much the Fed might be able to cut borrowing costs. Fed Chairman Jerome H. Powell signaled last week that central bankers were not seeing the progress they were hoping for before cutting rates.
The Fed will meet in Washington next week to discuss its next rate move. While it is widely expected that interest rates will be left unchanged in the May 1 decision, investors will closely watch a news conference with Mr. Powell for clues about how long rates are likely to remain steady. . If inflation remains stable in the coming months, it could prompt authorities to keep interest rates at the current relatively high levels for longer as they look to put the brakes on the economy and eliminate price increases altogether. Let’s try.
“There’s a lot of uncertainty about the disinflation path,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist. “You’re looking at an economy that is moving along quite well.”
Policymakers raised interest rates to 5.33 percent between March 2022 and last summer and have kept them steady since then. He believes it is so high that it will eventually have an impact on the economy – in the language of economics, it is “restrictive”.
But some economists have begun to question how restrictive the Fed’s current rate setting is, as growth remains solid and hiring is ramping up even after months of relatively high rates.
Data released Friday showed the momentum continued in March: Consumer spending rose 0.8 percent for the second consecutive month, ahead of forecasters’ expectations. That spending is being supported by a strong market that is pushing up wages: Americans’ after-tax income in March significantly outstripped price growth for the first time since December.
Separate data from a University of Michigan survey on Friday showed consumers became slightly more pessimistic in April about the outlook for both the economy overall and inflation in particular.
Stock indexes rose Friday morning as Wall Street was bracing for a slightly worse inflation report after data released Thursday suggested price increases in March may have been higher than personal consumption expenditure data suggested. Is.
Friday’s data “can be viewed with a sigh of relief,” Omair Sharif, founder of Inflation Insights, wrote in a note after the report.
Still, investors see more potential for a longer period of higher rates — which would weigh on stock prices — than they did a month or even just a week ago. Investors are now betting that the Fed could take its first steps in September or later, depending on market pricing. A small but growing share thinks the central bank may not cut rates at all this year.
Given the pace of the economy, some economists are also wondering whether Fed officials might start considering raising rates again.
Fed Governor Michelle Bowman has already said that while this was not her “baseline outlook”, she “saw a risk that we may need to raise the policy rate further at a future meeting.”
While markets may consider whether rates could rise again, it’s more likely the Fed will keep them high for a longer period of time, said Blerina Urusi, chief U.S. economist at T. Rowe Price.
Instead of the stalled progress seen in recent months, the Fed would likely have to push borrowing costs back up to see a pronounced acceleration in inflation, he said.
“I don’t think we’re at the point where we need to talk about raising interest rates this year,” Ms Urusei said. “But we’re definitely at the point where we need to talk about fewer cuts.”
Many economists think inflation is still likely to slow further, partly because new rental prices are still slowly being incorporated into official inflation data. But the process is taking longer than many expected, and with the economy so strong, the risk that inflation will remain stagnant has increased.
Moreover, economists have regularly found their predictions for inflation in the face of economic surprises in recent years: It was not expected to grow as fast in 2021 and 2022, and then it was below several projections late last year. Fell a little faster in comparison. Now, its flatlining has been a surprise.
“After the last several years, you have to be humble,” Mr. Luzzetti said.
Higher interest rates are meant to curb inflation by making consumers and businesses more reluctant to spend. This appears to have happened to some extent: higher mortgage rates have led to a sharp downturn in the housing market, and businesses have pulled back capital investment and posted fewer job openings.
But the economy as a whole has proven remarkably resilient to the effects of higher borrowing costs. Consumers are particularly relaxed, choosing to draw down savings and rack up credit card debt, even as they complain about high prices. Americans saved just 3.2 percent of their after-tax income in March, the lowest rate since 2022.
At Portland Gear, a clothing retailer in Portland, Oregon, sales are setting records as customers are buying $79 sweatshirts and $36 baseball caps, company founder Marcus Harvey said.
“Consumers may say things are getting more expensive, but their purchasing habits aren’t actually saying that,” he said.
As a result, despite high interest rates, Mr Harvey is continuing to invest. The company recently opened a flagship store in Downtown Portland and is opening a location at the city’s airport.
“It is what it is: rates will remain high for the next five years,” Mr Harvey said. “You can’t do anything about it. Business continues. Life goes on.”
