This week’s inflation data could help determine Fed’s timeline for rate cuts

WASHINGTON – After Federal Reserve officials meet this week, a statement they will issue could suggest they have seen significant changes progress on inflation this year – a prelude to possible interest rate cuts.

However, it’s hard to say because the employees themselves may not know for sure until they start the meeting. This is because the government’s latest picture of US inflation will be released on Wednesday morning, just before the Fed begins its second day of policy discussions.

A key issue is a phrase the Fed added your statement after their last meeting, on May 1: He stated that “there has been a lack of further progress” towards bringing inflation back to the central bank’s 2% target.

Inflation reached uncomfortably high levels in the first three months of this year, dampening hopes that it would continue to cool steadily, as it did in the second half of last year.

In April, however, consumer inflation slowed down again, even if slightly. And if the May inflation report, released on Wednesday, shows further signs of improvement, it is possible that the Fed will remove that phrase from its statement. It would be an encouraging sign if policymakers could reduce their benchmark rate within a few months. Rate cuts would ultimately lead to lower costs for mortgages, auto loans and other forms of consumer and business lending.

But whether or not the ruling is withdrawn or changed, most economists think rate cuts are not likely before September at the earliest. Chairman Jerome Powell will likely stress at a press conference on Wednesday that policymakers will need several more months of low inflation readings before they consider lowering their benchmark rate.

A Fed rate cut could give the economy a modest boost, which would be welcomed by President Joe Biden’s re-election campaign, which is struggling to counter many voters’ dissatisfaction with rising inflation in recent years. While consumer inflation has slowed sharply since peaking at 9.1% in mid-2022, it was still 3.4% in April, well above the Fed’s target.

The Fed would cut rates more quickly if growth stagnates and companies lay off too many workers. But on Friday, the government reported a robust job gain in May, with employers from various sectors creating jobs. The report prompted Wall Street investors to downgrade their forecast for Fed rate cuts to just one this year from two.

The Fed is expected on Wednesday to keep its benchmark rate unchanged at about 5.3%, its highest level in 23 years, where it has been since July. Policymakers will also publish updated economic projections, which are expected to show that they anticipate one or two rate cuts by the end of the year, down from three in March.

At his press conference, Powell will likely reiterate that Fed officials need more confidence that inflation is returning to 2% before they consider rate cuts, and that this will likely take longer.

“The Fed’s narrative will be very similar to what we’ve been hearing: ‘We’ve made progress in reducing inflation; We’re not in a rush to cut rates,’” said Nathan Sheets, a former Fed senior economist and global chief economist at Citi.

Another question Powell may address is whether the economy is starting to weaken. Growth slowed sharply in the first three months of the year, to an annual rate of just 1.3%, down from 3.4% in the final quarter of last year.

The number of open jobs fell in April to the lowest level in three years, although the number remains high by historical standards. And consumers actually reduced their spending in April after adjusting for inflation, a sign that high prices and high interest rates are putting a strain on Americans’ finances.

While solid job growth in May helped ease some of these concerns, the unemployment rate rose for the second month in a row, to 4%.

These tentative signs of weakness could help clarify an ongoing debate among Fed officials: To what extent are higher rates hurting the economy? Policymakers have increased borrowing costs over the past two years with the aim of slowing spending enough to control inflation.

Given last year’s strong growth and substantial job gains earlier this year, some officials began to doubt that their rates were high enough. Minutes from the Fed’s most recent meeting suggested that some officials even expressed openness to additional rate hikes.

A cooling economy would “reinforce their story that (interest rate) policy is tight,” said Donald Kohn, former vice chairman of the Fed Board of Governors and senior fellow at the Brookings Institution. doubting – myself included – for a while when everything was getting so strong.

Last month, John Williams, president of the New York Fed, said there was “ample evidence” that higher rates were constraining the economy. Home sales fell. And spending on appliances, furniture and other high-priced goods slowed.

The Fed’s cautious approach to rate cuts contrasts with that of some of its foreign counterparts. On Thursday, the European Central Bank announced your first rate reduction in five years, citing progress made in slowing price increases. Inflation fell from a peak of 10.6% to 2.6% in the 20 countries that use the euro currency.

Canada’s central bank also cut rates last week. The Bank of England will meet on Thursday, although it is unclear whether it will make cuts. The Bank of Japan is the only major central bank to raise rates, which it does in response to a rise in prices after decades of deflation.