Finance
Fed wants more confidence that inflation is moving toward 2% target, meeting minutes indicate
Federal Reserve officials at their March meeting expressed concern that inflation wasn’t moving lower quickly enough, though they still expected to cut interest rates at some point this year.
At a meeting in which the Federal Open Market Committee again voted to hold short-term borrowing rates steady, policymakers also showed misgivings that inflation, while easing, wasn’t doing so in a convincing enough fashion. The Fed currently targets its benchmark rate between 5.25%-5.5%
As such, FOMC members voted to keep language in the post-meeting statement that they wouldn’t be cutting rates until they “gained greater confidence” that inflation was on a steady path back to the central bank’s 2% annual target.
“Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent,” the minutes said.
In what apparently was a lengthy discussion about inflation at the meeting, officials said geopolitical turmoil and rising energy prices remain risks that could push inflation higher. They also cited the potential that looser policy could add to price pressures.
On the downside, they cited a more balanced labor market, enhanced technology along with economic weakness in China and a deteriorating commercial real estate market.
U.S. Federal Reserve Chair Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., March 20, 2024.
Elizabeth Frantz | Reuters
They also discussed higher-than-expected inflation readings in January and February. Chair Jerome Powell said it’s possible the two months’ readings were caused by seasonal issues, though he added it’s hard to tell at this point. There were members at the meeting who disagreed.
“Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations,” the minutes stated.
That part of the discussion was partly relevant considering the release came the same day that the Fed received more bad news on inflation.
CPI validates their concern
The consumer price index, a popular inflation gauge though not the one the Fed most closely focuses on, showed a 12-month rate of 3.5% in March. That was both above market expectations and represented an increase of 0.3 percentage point from February, giving rise to the idea that hot readings to start the year may not have been an aberration.
Following the CPI release, traders in the fed funds futures market recalibrated their expectations. Market pricing now implies the first rate cut to come in September, for a total of just two this year. Previous to the release, the odds were in favor of the first reduction coming in June, with three total, in line with the “dot plot” projections released after the March meeting.
The discussion at the meeting indicated that “almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected,” the minutes said. “In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven.”
In other action at the meeting, officials discussed the possibility of ending the balance sheet reduction. The Fed has shaved about $1.5 trillion off its holdings of Treasurys and mortgage-backed securities by allowing up to $95 billion in proceeds from maturing bonds to roll off each month rather than reinvesting them.
There were no decisions made or indications about how the easing of what has become known as “quantitative tightening” will happen, though the minutes said the roll-off would be cut by “roughly half” from its current pace and the process should start “fairly soon.” Most market economists expect the process to begin in the next month or two.
The minutes noted that members believe a “cautious” approach should be taken.
Finance
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Egg prices keep soaring, but inflation is moving in the right direction. (iStock)
Consumer prices fell 0.1% in March, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS). This is the first monthly drop since July 2022.
Annual inflation increased 2.4% compared to a 2.8% increase registered in February. Core inflation, which excludes volatile energy and food prices, grew at a pace of 2.8% over the last year, the smallest 12-month increase since March 2021. A decline of 6.3% in gas prices more than offset increases in the indexes for electricity and natural gas. Food, however, rose 0.4% in March. The meats, poultry, fish and eggs index rose 7.9% over the last 12 months and the price of eggs alone jumped 60.4%.
Inflation continues to move towards the Federal Reserve’s 2% target rate. Still, the impact of President Donald Trump’s implementation of new tariff measures could derail this progress and hinder economic growth, according to Jim Baird, Plante Moran Financial Advisors’ chief investment officer.
“As consumers brace for the impact of tariffs on prices on a host of staples and discretionary goods, there’s considerable uncertainty on what that near-term magnitude of the impact will be for growth and inflation, although the direction for each is clearer,” Baird said. “That’s sent economists scrambling to update their forecasts to lower growth and increase expected inflation for the duration of the year.”
Despite concerns about the effects of President Trump’s tariffs, the Fed continues to hold interest rates steady, and it’s not expected to make any significant changes soon, including a potential rate cut. While tariffs could lead to higher inflation and slower economic growth, the Fed is waiting for more clarity on the full impact of these policies before deciding on any course of action.
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Recession risks increasing
President Trump’s tariffs are also contributing to an increased risk of recession. Several major financial institutions, including Goldman Sachs and J.P. Morgan, have raised their recession probabilities. According to Baird, part of the problem is that as prices rise due to tariffs, consumers may decide to curb their spending.
“Sentiment has soured in recent months, and there are already signs of not only a more cautious mood but more constrained spending,” Baird said. “Prices may rise, but that doesn’t mean that consumers will pay any price for any product. Some may grumble but continue to spend, but many are much more likely to trade down to cheaper alternatives or delay discretionary purchases.
“That reality raises the probability of a more notable slowdown in the pace of the economy, with the risk of recession also rising,” Baird continued.
You can take out a personal loan before future rate hikes to help pay down high-interest debt. Visit Credible to find your personal loan rate without affecting your credit score.
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Spring homebuying season looks promising
March shelter inflation data showed it dropped to 4.0% from 4.2% in February. That’s good news since shelter inflation has been a major force in keeping inflation elevated in recent years and could help move the needle on interest rates.
Mortgage rates continue to trend down, remaining under 7% for the twelfth consecutive week and could boost spring sales, according to Freddie Mac Chief Economist Sam Khater.
“As purchase applications continue to climb, the spring homebuying season is shaping up to look more favorable than last year,” Khater said.
The average 30-year fixed-rate mortgage was 6.62% for the week ending April 10, according to Freddie Mac’s latest Primary Mortgage Market Survey. That’s a decrease from the previous week, when it averaged 6.64% and lower than the 6.88% it was a year ago.
“Unfortunately, inflation remains painfully stubborn, well above the Fed’s 2% target for lowering rates,” said Gabe Abshire, Move Concierge CEO. “Considering the housing sector has lower exposure to the current global trade environment, it would be helpful for the Fed to lower rates and boost the Spring and Summer home buying market.”
If you want to become a homeowner, you can find your best mortgage rates by shopping around. Visit Credible to compare your options without affecting your credit score.
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A global trade slowdown tied to U.S. tariffs will likely create a more challenging environment for bond fund managers, according to financial futurist Dave Nadig.
“All of these capital holding requirements that led to buying U.S. Treasurys are kind of unwinding at the same time,” the former ETF.com CEO told CNBC’s “ETF Edge” on Wednesday. “So, the traditional math of things are bad for stocks, [and] everybody is going to buy bond just isn’t working out this time because the kind of shock we’re seeing is one we’ve never seen before.”
The benchmark 10-year Treasury Note yield increased to 4.4% on Thursday. The yield is up more than 10 percent just this week. Last Friday, it touched 3.86%.
Nadig thinks slowing trade will continue to impact market activity.
“When you have less trade, you need to finance less trade,” he said. “Historically, people have needed to finance dollars. That’s why every country in the world buys U.S. Treasurys. It helps them manage their international trade with the United States. So, if we’re slowing down the amount of international trade, we should expect in aggregate the holdings of bonds to probably come down.”
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