Source: Golden Ten Data

A series of disappointing inflation data is forcing the Federal Reserve to reschedule the first rate cut and reassess the trajectory of inflation

Federal Reserve Chairman Powell reiterated this message this week. He said that it may take “longer than expected” to gain the confidence needed to cut interest rates. This has shattered hopes of cutting interest rates more than twice in 2024. Some people are even worried that the Fed may not cut interest rates at all this year.

Diane Swonk, KPMG's chief economist, said, “This confirms that the Federal Reserve is willing to wait. People are worried that the austerity may be too small and that demand is still huge.”

Powell is in no hurry to adjust interest rates, just like his colleagues. Continued strength in the economy and labor market, combined with a rebound in the market at the beginning of the year, reignited the debate on the extent of monetary policy restrictions.

Federal Reserve officials are increasingly worried that the current high interest rates may not be enough to curb demand, which heightens investors' and analysts' concerns that the Federal Reserve may need to raise interest rates further.

Most policymakers have made it clear that they expect interest rates to be at their peak, but some Federal Reserve officials say they are willing to restart rate hikes if necessary.

New York Federal Reserve Chairman Williams called the current policy restrictive. He said on Thursday that interest rate hikes were not his basic expectations. But he added that if economic data supports interest rate hikes to meet the Federal Reserve's inflation target, then a rate hike is possible.

Boston Federal Reserve Chairman Collins was happy about the rapid slowdown in inflation last year in a recent speech, but she is worried that inflation may rise again if demand does not cool down.

“This means demand needs to slow down before the Federal Reserve can meet its price stabilization target,” Collins said in an April 11th speech. “So while the flexibility of economic activity is good news, it also raises questions about the extent to which monetary policy positions have curtailed demand.”

According to median estimates from foreign media surveys, economists currently expect the Federal Reserve to cut interest rates twice this year, lower than the March forecast of three.

Last year's anti-inflation progress can be largely attributed to improvements in the economy's supply side: chaotic supply chains were finally unraveled, and large numbers of immigrants poured in to help fill vacant jobs.

Meanwhile, demand remains strong. In the second half of 2023, the US economy continued to grow at the fastest rate in two years. Just last month, retail sales increased 0.7%, exceeding economists' expectations.

But since demand is the main channel through which monetary policy works, its continued existence raises doubts about the extent to which the policy is limiting the economy.

Sarah House, senior economist at Wells Fargo Bank, said, “If you don't know how restrictive the policy is, you can almost just keep walking and watching. The uncertainty surrounding the strength of policy restrictions may prolong the continuation of high interest rates.”

The financial situation also played a role. At the end of last year, when Federal Reserve officials started talking more about cutting interest rates, the market rebounded.

At the time, the S&P 500 index climbed, and the 10-year US Treasury yield plummeted from nearly 5% in October last year to below 4% in early 2024. In recent weeks, US bond yields have climbed due to disappointing inflation data.

Marc Giannoni, chief US economist at Barclays Bank and a former Federal Reserve economist, said, “We are beginning to worry that the financial situation will ease again and that progress in inflation may stop at a high level. Unfortunately, this seems to be happening.”

Federal Reserve Governor Bowman also expressed similar thoughts on Wednesday. She said progress on inflation may have stalled. Bauman called the policy restrictive, but she added, “Time will tell if it's strict enough.”

“If policies are tight enough, we cannot expect financial market activity and the economy to continue to grow,” Bauman said.

Some policymakers are increasingly aware that the post-COVID-19 economy is fundamentally different from the economy of the years before the pandemic, whether it's the potential for higher productivity or the rise of remote work. Furthermore, high interest rates have caused the US economy to borrow more than what many Americans are used to.

Cleveland Federal Reserve Chairman Meester said that she raised her estimate of long-term federal funds interest rates at the FOMC meeting last month. She pointed out that in the face of higher interest rates, the economy has shown resilience, while so-called neutral interest rate valuations are also rising. Michael Bordo, professor of economics at Rutgers University, said:

“With inflation and a good economy, why are they cutting interest rates? The Federal Reserve may not really need to cut interest rates too much; it is possible that neutral interest rates have already risen.”

Editor/jayden