Still-high U.S. inflation has raised growing concerns and clouded the Federal Reserve's prospects for easing monetary policy, with a growing number of Fed officials saying they are in no rush to cut interest rates.
New York Fed President John Williams told reporters on Thursday that there is "no obvious need to adjust monetary policy in the near term," a day after consumer price inflation beat expectations across the board, prompting traders and some analysts to predict the Fed will delay and possibly reduce interest rate cuts.
“Recent data suggest that it may take longer than I previously thought to gain greater confidence in the downward trajectory of inflation before beginning to ease policy,” Boston Fed President Collins said in a separate speech in New York. She added that the strong labor market “also reduces the urgency” to ease policy.
The two Fed officials echoed recent comments from colleagues who have warned against cutting interest rates too quickly as inflation appears to be on a "bumpy" path back to the central bank's 2% target.
Inflation has proven to be more thorny than Fed officials had predicted just months ago, and other economic indicators show no signs of slowing down. These factors have combined to further delay the expected start of a cycle of rate cuts.
Richmond Fed President Barkin, who has said he struggles to reconcile the breadth of current inflation with the progress the Fed needs to see in cutting interest rates, said on Thursday that the latest data did not bolster his confidence that price pressures across the economy are broadly easing.
To be sure, Fed officials all agree that rate cuts will be needed in the future, with Collins saying "later this year," Williams saying "eventually," and Barkin saying "depending on the incoming data." Williams is a permanent voter and Barkin is a rotating voter this year.
Williams said the "sharp rise" in recent inflation data was not unexpected, and if anything it was that price pressures eased too quickly last year.
Spillover effects of Fed policy
The Fed's delay in cutting interest rates could also affect the monetary policy direction of other major central banks. The president of the European Central Bank kept its policy rate unchanged on Thursday but hinted at a rate cut as early as June as the euro zone's labor market has begun to weaken and economic growth has stagnated.
Despite ECB President Christine Lagarde's insistence that the central bank is "not dependent on the Fed", sources told Reuters the ECB may pause its rate cuts after June and wait for the Fed to provide more clarity on its rate decision.
Some analysts pointed out that the ECB has verbally taken the impact of the Fed's policy more seriously than it did in March. "The United States is a very large market, a very large economy and a major financial center, so all of this goes into our forecasts," Lagarde told reporters at a press conference.
At the same time, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said that continued high US interest rates are "not good news" for the rest of the world because it attracts global liquidity into the US market and puts the rest of the world "into some kind of trouble."
After stronger-than-expected U.S. consumer price index data for March, markets generally reconsidered their expectations on when the Federal Reserve would be able to cut interest rates this year. Financial markets now expect the Fed to start cutting rates in July or September, compared with the previous expectation of June.
Economists at several Wall Street investment banks, including Goldman Sachs, Bank of America, Barclays and Wells Fargo, also changed their forecasts after the CPI data was released, predicting only one or two rate cuts this year, instead of the previous three. Some economists even believe that the Fed may not cut interest rates until 2025.
Bank of America now expects the Fed to cut interest rates only once in 2024, with the first cut in December, and raised its terminal interest rate forecast by 50 basis points to 3.5-3.75% in 2026. The bank's previous expectation was to start cutting interest rates in June and cut interest rates by 75 basis points for the whole year.
The article is forwarded from: Jinshi Data
