The president of the Federal Reserve, Jerome Powell, had already recently warned that the latest inflation data kept interest rate cuts away. This Friday the last price data that remained to be published before the Federal Reserve monetary policy committee meeting next week was released. It was the personal expenditure price index (PCE), a deflator of private consumption that is the Fed's preferred indicator. The figure has met forecasts. That means that inflation becomes entrenched and rate cuts will have to wait.
The general PCE index has increased three tenths in the month and the interannual rate has therefore risen from 2.5% to 2.7%. It was the third consecutive month in which the index has moved at a rate higher than that compatible with the Federal Reserve's 2% inflation goal. For its part, the deflator for personal expenses without energy or food has remained at 2.8% year-on-year, after also rising 0.3% in March. The figures confirm what was pointed out by the consumer price index, which was known two weeks ago.
The Federal Reserve looks more closely at the PCE inflation indicator than at the consumer price index (CPI). The PCE index tries to take into account changes in the way people shop when inflation rises. It may reflect, for example, when consumers switch from more expensive brands to cheaper ones. In general, the PCE index tends to show a lower inflation rate than the CPI, in part because rents have twice the weight in the CPI.
In the latter part of last year, inflation appeared to be giving ground and was approaching the 2% price stability target set by the central bank. However, since the beginning of the year the data has gone in the opposite direction. Powell spoke at first of bumps in the road, but then he has come to assume that the problems are bigger.
“Recent data have clearly not given us greater confidence” that inflation is heading sustainably toward the 2% price stability goal, he said last week at an event on the sidelines of the International Monetary Fund's spring meetings. (IMF). On the contrary, there are signs “that it is likely to take longer than expected to achieve that trust,” he added.
“We believe the policy is well placed to manage the risks we face,” he said, asking for more time for the restrictive policy to work and let the data speak. His comments were interpreted as meaning that there would be no imminent reductions, but he also seemed to rule out additional increases even if inflation remains entrenched.
Investors are already ruling out a rate cut at the May and June meetings and practically also in July. They still give some probabilities to a movement in September, but more and more are leaving it for November, after the presidential elections, or December, as deduced from the quotes on the Chicago futures market.
After the last monetary policy meeting, Powell made it clear that although it is likely that the price of money has marked its maximum of this cycle (it is at 5.25%-5.5%, its maximum in 23 years) the first lowering rates cannot be done lightly. Since March 2022, the Federal Reserve has raised its benchmark rate 11 times to combat the highest inflation in four decades. Rate hikes have also been the most aggressive since the 1980s.
In March, the members of the Federal Open Market Committee of the Federal Reserve updated forecasts, which do not commit them, on the evolution of rates. They maintained the path of three cuts of 0.25 points in interest rates until the end of the year, although just barely, since 9 of the 19 members of the committee expected a somewhat smaller reduction. Those forecasts have become outdated with the latest inflation data.
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