Fed officials recognize inflation progress, adopt cautious tone about policy easing
- Fed policymakers’ comments will be scrutinized by investors following the April inflation report.
- Markets see a waning probability of a Fed policy hold in September.
- Fed rate outlook could influence the risk mood and the US Dollar’s performance.
Federal Reserve (Fed) policymakers are scheduled to deliver speeches on Friday as investors reassess the interest rate outlook following the April Consumer Price Index (CPI) data. According to the CME FedWatch Tool, the probability of a no change in the Fed’s policy rate in September holds around 30%.
Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly are among the Fed officials that will speak in the American session.
Earlier in the day, Fed Governor Christopher Waller delivered a prepared speech at the International Organization for Standardization Technical Committee 68 Financial Services 44th Plenary Meeting on Friday but refrained from commenting on the monetary policy or the economic outlook.
The Fed has adopted a cautious tone regarding the timing of the policy pivot following the stronger-than-expected inflation readings in the first quarter of the year. The US Bureau of Labor Statistics reported on Wednesday that the core Consumer Price Index (CPI) rose 3.6% on a yearly basis in April. This reading followed the 3.8% increase recorded in March and came in line with the market expectation. On a monthly basis, the CPI and the core CPI both rose 0.3% after rising 0.4% in March. The US Dollar (USD) came under bearish pressure as market participants assessed the inflation data and the USD Index fell to its lowest level in over a month, losing 0.7% on the day.
Fed’s Bowman: Inflation decline late last year was temporary
Federal Reserve (Fed) Board of Governors member Michelle Bowman hit newswires on Friday, noting that progress on inflation may not be as consistent as many hoped.
Bowman comments
Inflation’s decline in the latter half of last year was temporary.
We have not seen further progress on inflation this year.
US economic activity may have moderated, but consumer services spending is strong, and business investment has strengthened.
Progress on the labor market rebalancing has slowed.
Focusing on issues like climate change could distract bank management and supervisors.
My baseline outlook is that inflation will decline further with the policy rate steady, but I see risks.
I will remain cautious in rate change decisions, I am willing to hike if inflation progress stalls or reverses.
Inflation is to remain elevated for some time.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Fed policymakers’ comments from Thursday
Federal Reserve (Fed) Bank of Atlanta President Raphael Bostic appeared late Thursday alluding towards the possibility of late-2024 rate cuts, but cautioned the need for patience on interest rates.
Fed Bostic additional comments
“I am pleased with inflation progress in April but the Fed is not yet there.”
“The Fed has to be patient and vigilant.”
“There is still a lot of pricing pressure in the economy.”
“I am hearing businesses say they are at the limits of pricing power and not able to fully pass-through input costs.”
“Firms can’t 100% pass through prices, the economy is slowing.”
“It could be appropriate to reduce rates toward year-end.”
“My outlook right now is for a continued fall in inflation, which would make appropriate to reduce rates later in the year, but nothing not locked in.”
“I expect inflation to fall slowly, continued economic momentum.”
“I have to be open to a broad range of possibilities, with a number of different scenarios that could play out.”
Loretta Mester, President of the Federal Reserve Bank of Cleveland, emphasized that maintaining the current levels of Fed policy will aid in returning still-elevated inflation to the 2% target.
Fed Mester additional comments
“Current restrictive policy will help lower inflation.”
“Monetary policy is well-positioned as the Fed reviews more data.”
“It will take longer to gain confidence that inflation is moving towards 2%.”
“Strong economy means Fed risking little to hold policy in place.”
“Risks to inflation side of the Fed mandate have increased.”
“Downside risks to growth, hiring have fallen.”
“Expecting gradual progress on lowering inflation.”
Richmond Federal Reserve Bank President Thomas Barkin told CNBC on Thursday that the latest Consumer Price Index (CPI) showed that inflation is not where the Fed is trying to get.
Fed Barkin additional comments
“Companies are still saying there is no crime in trying to raise prices.”
“Services in particular still feel they can raise prices.”
“Latest retail sales numbers point to a good but not great consumer spending.”
“Overall, labor market numbers are normalizing.”
“Jobless claims are low by historic standards but may be edging up.”
“I do believe inflation is coming down, but will take more time.”
“The question now is for how long rates need to be held where they are to get the required impact on inflation.”
“The inflation story is much longer term than what happens in the market.”
“Labor market conditions are strong.”
Federal Reserve Bank of New York President John Williams said that the doesn’t see the need for a rate cut in the near term. Commenting on the April Consumer Price Index (CPI) data, “kind of a positive development after a few months, where the data were disappointing,” Williams told Reuters in an exclusive interview.
Fed Williams additional comments
“Overall trend for slowing inflation looks good.”
“Optimistic inflation will continue to retreat.”
“Still lack confidence inflation is moving sustainably to 2%.”
“Monetary policy is restrictive and it’s in a good place.”
“No current need to raise interest rates.”
“Economy is moving into better balance.”
“Job market is still tight, but excesses are waning.”
“Hopeful job market can balance without big rise in unemployment.”
“Expecting unemployment to rise to 4% this year.”
“Seeing inflation in low 2% range by year-end, around 2% next year.”
“Need not wait until inflation exactly at 2% to ease policy.”
“Balance sheet policy changes aimed at limiting market impact.”
“Fed balance sheet is still having a modest impact on yields.”
“No major signs of financial market risk.”
“I am pleased with inflation progress in April but the Fed is not yet there.”
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