By Andrew Moran
The message was loud and clear from multiple Federal Reserve officials: interest rates will stay higher this year, the benchmark rate might increase, and it is unlikely there will be any rate cuts this year. Inflation is an issue that is still plaguing monetary policymakers, and restoring price stability, even in the face of a recession, is the chief priority for the U.S. central bank.
Since March 2022, the federal funds rate has been raised by 500 basis points to its highest level since late 2007.
Inflation is the Top Job
Atlanta Fed Bank President Raphael Bostic does not see any rate cuts “until well into 2024,” even if the U.S. economy slips into a recession.
Returning inflation to the Fed’s 2 percent target rate “is job No. 1,” according to Bostic.
“If there’s going to be some cost to that, we’ve got to be willing to do that,” he told CNBC on May 15 during the regional institution’s Financial Markets Conference.
Because of persistently high inflation, resilient consumer spending levels, and tight labor markets, “there’s still going to be upward pressure on prices,” Bostic added.
“If there’s going to be a bias to action, for me, it would be a bias to increase a little further as opposed to cut,” he said. “There’s still a lot of confidence that our policies are going to be able to get inflation back down to our 2% target. And to be fully clear, we’re going to do all that we need to make sure that that happens.”
In April, the annual consumer price index (CPI) eased below 5 percent for the first time in two years. In addition, the personal consumption expenditure (PCE) price index, the Fed’s preferred inflation gauge, slowed to 4.2 percent, the lowest since May 2021.
While the financial markets are mostly expecting a rate pause at the June Federal Open Market Committee (FOMC) policy meeting, there is a growing expectation that the Fed will start to slash interest rates toward the end of the year, according to the CME FedWatch Tool.
Won’t Get Fooled Again
Minneapolis Fed Bank President Neel Kashkari will not be satisfied with a few months of positive data.
Kashkari spoke at the Minnesota Transportation Conference & EXPO on May 15, explaining that the central bank has “more work to do on our end” to ensure the inflation rate returns to its 2 percent target.
“We need to finish the job,” he said, adding that the Fed needs to do so “in an orderly manner” without leading to a deep recession.
He also participated at a Northern Michigan University event on May 11, noting how he is concentrating on the connection between inflation, interest rates, and the effects these have on the banking system. At the same time, Kashkari conceded that the inflation outlook creates consternation.
“We’ve been surprised how persistent it has been. It is coming down, but so far it’s been pretty persistent,” the regional central bank head said. “The real question is when inflation is going to come down.”
Recent reports suggest that inflation outlooks among consumers have been sticky.
The University of Michigan’s one-year inflation expectations came in at 4.5 percent in May, down from 4.6 percent in April. However, the five-year-ahead inflation outlook rose to 3.2 percent, 3 percent in the previous month.
The Fed Bank of New York’s one-year horizon consumer inflation expectations slipped to 4.4 percent in April, down from 4.7 percent, according to the Survey of Consumer Expectations (SCE). The three- and five-year inflation expectations edged up to 2.9 percent and 2.6 percent, respectively.
Not Yet Convinced
Despite ten straight months of slowing inflation, Richmond Fed Bank President Thomas Barkin is still determining if price pressures are steadily declining. As a result, he is open to either an 11th straight rate hike or leaving the benchmark fed funds rate at a range of 5.00 percent and 5.25 percent.
For now, officials must assess the data as credit card spending is flat, the labor market remains tight, the banking sector faces significant stress, and financial markets monitor the debt ceiling standoff.
According to the Richmond Fed Bank chief, the employment situation has “moved from red hot to hot,” adding that there is “enduring inflation.”
“You could tell yourself a story where inflation comes down relatively quickly … with only a modest economic slowdown,” he told Reuters during a conference in Florida on May 15. “I’m not yet convinced … I do wonder whether we’re not going to need more impact on demand to bring inflation down to where we need to go.”
He also revealed to the Financial Times that if inflation persists or accelerates, “there’s no barrier in my mind to further increases in rates.”
Ultimately, Barkin will not make his final decision until leading up to the June 13-14 FOMC meeting.
One inflation metric the Fed, especially Chair Jerome Powell, is paying close attention to is core PCE services ex-housing. This measurement, which the central bank considers the most accurate picture of underlying inflation in the economy, eliminates housing and food prices and looks at everything from haircuts to healthcare to hospitality. Unfortunately for monetary policymakers, it has remained stubborn at above 4 percent.