Federal Reserve officials indicate adjustments may happen soon
Several Federal Reserve officials were surprised by inflation’s swift descent of inflation in 2023, according to a Bloomberg report, and for now they appear to be adjusting their projections in relation to interest rate cuts.
In recent remarks, both Richmond Fed President Thomas Barkin and Boston Fed President Susan Collins suggested a desire for the decline in inflation to not only persist, as previously stated by many officials, but also to encompass a wider range of sectors, particularly housing and other services. This shift is in response to the recent slowdown primarily driven by goods, the report said.
“Are they making a new benchmark, changing the goalposts? It sure seems like it,” said Michael Skordeles, head of US economics for Truist Advisory Services. “They have found enough rationale to put the stake in the ground to be patient.”
Since July, policymakers have maintained unchanged rates, and Fed Chair Jerome Powell has signaled skepticism about a rate cut in the upcoming month, emphasizing the necessity for greater confidence in inflation’s trajectory towards the 2% target. Delaying a rate reduction to await significant broadening in disinflation could further postpone the timing of the first rate adjustment.
Improving inflation sparking questions on interest rates
The notable improvement in inflation witnessed in recent months, confirmed in revisions released last Friday, primarily stems from energy price reversals, supply chain recuperation, and reduced costs for items like used cars and clothing. Although services inflation has moderated, aided by tempered wage increases amid increased labor market participation, progress has been sluggish.
Goods prices, excluding food and fuel, only rose by 0.2% in 2023, while the consumer price index for services, excluding energy, climbed by 5.3%, according to Bloomberg.
Barkin expressed cautious optimism, stating: “I am hopeful but still looking for more conviction that the slowing of inflation is broadening and sustainable.” He emphasized the need for the trend to “continue and broaden,” requesting a “few more months” of data to assess.
Fresh insights into inflation are expected with the release of the CPI on Tuesday, estimated to have dipped below 3% in January for the first time in nearly three years. The Fed’s preferred gauge of underlying inflation stood at 1.9% in December on a six-month annualized basis, below the 2% target.
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