Source: Golden Ten Data

Although the US presidential election is getting closer, US inflation has shown no signs of slowing recently, leaving Federal Reserve policymakers facing more uncertainty in determining next steps this week.

The Federal Reserve is expected to keep the benchmark interest rate at 5.25% to 5.5% during the April 30-May 1 meeting, and a key judgment in the current policy statement — inflation “remains high” — may have to stay the same as the pace of price increases accelerated during the first three months of this year.

Furthermore, the latest inflation report shows that there is high inflation in a range of goods and services. The FOMC voting committee, which includes Atlanta Federal Reserve Chairman Bostic and Richmond Federal Reserve Chairman Barkin, used this as a reason to cut interest rates cautiously. For example, data from March showed that in the personal consumer spending price index (PCE) used by the Federal Reserve to set a 2% inflation target, more than half of the sub-inflation rate exceeded 3%, far higher than the pre-pandemic average.

“The Federal Reserve is in trouble,” said Nathan Sheets (Nathan Sheets), Citibank's global chief economist. According to data released on Friday, PCE rose 2.7% per annum in March compared to 2.5% in February. After deducting volatile food and energy prices, core PCE rose 2.8% per annum in March, the same rate as in February. “This is very strong data, so it doesn't give policymakers confidence that the 2% inflation target will be met... the Federal Reserve can only wait.”

Seek “greater confidence”

Many analysts still expect the inflation rate to decline during the year. Ultimately, policymakers can call the recovery in inflation in the first quarter a “bumpy” in the anti-inflation path, and continue to implement interest rate cuts that have been anticipated since the end of last year.

However, interest rate cuts may have come even later, and investors have postponed expectations that the Federal Reserve will cut interest rates for the first time until September. That time coincides with the US presidential election. The economic situation may become a central issue, and the Federal Reserve's decision will inevitably trigger political interpretation.

The Federal Reserve's next interest rate decision will be announced at 2 p.m. EST on May 1. Federal Reserve Chairman Powell will hold a press conference at 2:30 p.m.

With no new economic predictions, the policy statement and Powell's remarks will lay the foundation for any future guidelines.

Over the past few months, the economy has been showing signs of slowing. Economic growth in the first quarter was only 1.6%, the lowest in nearly two years, but at the same time, prices and employment both showed strong growth. Officials' current strategy — to delay interest rate cuts until the data showed a convincing turnaround.

The March economic summary forecast shows that by the end of this year, the Federal Reserve will cut interest rates 3 times, 25 basis points each time. At that time, the market expected the first rate cut in June. However, Powell's last public speech before this week's meeting showed that this outlook had deteriorated.

Commenting on a Washington forum on April 16, Powell said, “The recent data clearly doesn't give us more confidence that inflation will return to a downward trend. Now, given the strength of the labor market and the progress made so far in fighting inflation, we should give restrictive policies more time to take effect, and let data and changing prospects guide us.”

J.P. Morgan economist Michael Feroli (Michael Feroli) said this message could be repeated.

Ferrori wrote, “This week's post-meeting statement is not expected to change much compared to the statement issued after the last meeting in March,” and Powell may once again emphasize that the Federal Reserve will postpone interest rate cuts if necessary, but is also prepared to act early if data is needed.

Avoiding political factors

Federal Reserve officials have downplayed the need to raise interest rates again. Currently, interest rates have been kept unchanged for 9 consecutive months, and the period of being on hold has exceeded three of the previous five policy cycles. Among them, before the outbreak of the 2007 global financial crisis and the end of the 1990s, the Federal Reserve kept interest rates unchanged for 15 months and 18 months, respectively.

The Federal Reserve's new economic summary forecast will be released in June. Ferroli said he does not expect Powell to “defend the claim that the March bitmap is still a relevant guide to policy prospects.”

In fact, investors now expect that interest rates may only be cut once this year; currently, it is expected to be in September.

However, unless the data strongly shows that inflation is falling rapidly or the economy is weakening, the September rate cut will put the Federal Reserve under a political microscope it would rather avoid — especially considering that Republican candidate Trump is hostile to Powell's interest rate hike during Trump's presidency.

Vincent Reinhart (Vincent Reinhart), chief economist at Dreyfus Mellon Bank and former head of the Federal Reserve's monetary department, said that even if the Fed's motive for cutting interest rates is based on data rather than politics, on the surface, they should probably avoid making any decisions in the fall.

After May, the Federal Reserve will hold policy meetings in June, July, and September, and November and December after the general election, respectively. Reinhart said, “To protect the reputation of the Federal Reserve, June and December are the safest times. Policymakers previously seemed to prefer June, but the data ruled out that possibility.”

edit/lambor