Inflation Downward Trend Continues, Fed Seeks More Evidence

Inflation Downward Trend Continues, Fed Seeks More Evidence

This week, Federal Reserve officials received affirmation that inflation is still on a downward trajectory, though the journey is not without its bumps. However, policymakers are unlikely to deviate from their stance that they require further evidence.

Slowest Growth in Inflation Gauge, Consumer Spending Retreats

The Fed’s preferred gauge of underlying inflation eased last month, showing the slowest growth this year, according to government data released Friday. Additionally, following a softer economic expansion in the first quarter than initially anticipated, consumers scaled back their expenditures in April.

Inflation easing suggests cautious economic growth, reflected in consumer spending slowdown, signaling potential economic challenges, according to WSJ Print Subscription.

Economy Slowing in Line with Preferences, Rate Cut Unlikely in July

These reports depict an economy that is slowing down in line with policymakers’ preferences, alleviating concerns about a resurgence in price increases. Nevertheless, officials are expected to depart their upcoming meeting in the following weeks seeking additional validation before considering interest rate reductions.

Expert Insights: More Evidence Needed Before Rate Cut Consideration

Julia Coronado, founder of MacroPolicy Perspectives LLC and a former Fed economist, remarked, “There’s progress in the right direction, which is positive news for the Fed regarding inflation,” adding, “It’s just one month of data. They likely require more evidence before they’re convinced that progress has resumed.” She suggested that a rate cut in July is improbable but deemed a September adjustment “reasonable” if the current trend persists.

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Policymakers Weighing Interest Rate Effects on Economic Growth

Policymakers gear up for the June 11-12 meeting, expected to weigh the effectiveness of prevailing interest rates. They’ll assess if rates are curbing growth and nudging inflation toward the 2% target. Alternatively, they might question if their efforts are less impactful than assumed. They’ll debate the extent of their influence on the economy.

Divided Views Within Fed, Rate Hike Unlikely, Flexibility Needed

John Williams, President of the New York Fed, emphasized on Thursday that there is “abundant evidence” indicating that monetary policy is restraining economic activity, expressing his anticipation of further inflation declines in the latter half of the year. He indicated that a rate hike is improbable. However, some remain less assured. Lorie Logan, President of the Dallas Fed, remarked later on Thursday that high interest rates might not be curbing growth to the extent previously believed, suggesting that policymakers need to remain flexible in their approach to future actions.

Policy Outlook: More Data Needed, Borrowing Costs to Stay Elevated

Overall, policymakers have emphasized the necessity for more data to gain clarity on the trajectory of inflation and interest rates, implying that borrowing costs will persist at elevated levels for an extended period.

Fed Meeting Expectations: No Rate Cut Indications, Focus on Data Gathering

Officials are unlikely to make more public statements on the economy before the next central bank meeting. The Fed is widely anticipated to maintain its benchmark interest rate at its highest level in two decades. It has held this position since July.

Expert Opinion: No Imminent Rate Cut, Focus on Second Half Outlook

Sarah House, senior economist at Wells Fargo & Co., predicts no rate change in the upcoming meeting. She anticipates no signals for an imminent rate cut. House believes the Fed will focus on gathering data. The outlook for the second half of the year will likely shape future decisions.

Rate Cut Timing Uncertain, Economic Projections to Offer Insight

While most policymakers are uncertain about the timing of the initial rate cut, the economic projections presented at the June meeting will offer insight into the number of reductions they anticipate this year. In their most recent forecasts submitted in March, officials tentatively suggested three rate cuts. According to futures contract pricing, investors anticipate a single rate cut by the end of the year.

R-Star Debate: Neutral Rate Impact on Policy Considerations

Federal Reserve officials are discussing if the neutral rate rose since the pandemic’s start. This rate, termed r-star, impacts borrowing costs. A higher r-star suggests less restrictive interest rates. It’s a crucial factor in shaping monetary policy.

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