Signs of moderating price pressures in April will give Federal Reserve officials room to pause their aggressive tightening campaign next month, although inflation remains too hot for policymakers to consider. the cut interest.
The consumer price index up 4.9% from a year earlier, the first reading below 5% in two years, a Bureau of Labor Statistics report showed Wednesday. Apart from food and energy, the so-called core consumer price index also cooled slightly. But perhaps more importantly for the Fed, the report showed a slight increase in some key service costs, as airfares and hotel costs declined.
“A quick reading shows a tilt towards some potential further tightening of monetary policy,” said Gregory Daco, chief economist at EY. “But if you lift the lid and look at the underlying details of this report, it actually mostly points to a higher probability of stopping.”
Markets are still looking for the US central bank to cut rates later this year, amid fears that credit tightening after a string of bank collapses will lead to a marked economic slowdown. But Wednesday’s data suggests officials are still a ways away from declaring victory against inflation.
Policymakers raised interest rates last week for the 10th time in a row, bringing their benchmark rate target above 5% for the first time since 2007. suggesting they want time to assess how the most aggressive tightening campaign since the 1980s is working its way. through economics.
While inflation was the main reason for the Fed’s rapid rate hikes last year, officials indicated that the impact of credit tightening is likely to weigh on how they proceed as they near the end of their rate cycle. -hiking rate.
Recent strains on the banking system have raised concerns that a looming credit crunch could weigh on the economy and tip it into recession. Policymakers say the impact is uncertain, however, and some say it could help curb price pressures.
“While the April CPI report is not exactly reassuring, it also does not dissuade Fed officials from signaling another rate hike in June, given their expectation that the full disinflationary effect will come from tighter conditions in credit has not yet appeared,” said Anna Wong, chief US economist for Bloomberg Economics. “However, the slow progress in reducing core inflation underscores how unlikely the Fed is to cut rates this year.”
A Fed report on Monday showed that banks are reporting stricter standards and weaker demand for loans in the first quarter. But the numbers suggest the continuation of a trend that began before the recent stresses in the banking sector emerged, not necessarily an acceleration of tighter credit conditions.
New York Fed chief John Williams said on Tuesday that he would closely monitor how the impact on the banking sector affects the US economy, and left the door open to leaving interest rates unchanged next time. that month.
Williams also said officials would tighten as needed to bring inflation down to the Fed’s 2% goal, but pushed back against expectations that the Fed would lower borrowing costs soon.
“I don’t see in my baseline forecast any reason to cut interest rates this year,” he said at an event with the Economic Club of New York.
In an interview with the Associated Press, Richmond Fed President Thomas Barkin said that the release of data on Wednesday showed that inflation remained stubbornly high.
He said the Fed’s message at last week’s meeting provided the option for further rate hikes or waiting if it was appropriate, the AP reported.
Powell told reporters after the May 3 decision that his forecast is for the US economy to experience moderate growth this year, not a recession.
But other policymakers, including Chicago Fed president Austan Goolsbee, struck a more cautious tone. “I definitely got vibes – like you – in the market and in business contacts that the credit crunch is starting, or at least a credit squeeze,” said Goolsbee on Monday in an interview with Yahoo! Bill.