Is the US Economy Boiling Over? Exploring the Impact of Rising Inflation on Fed's Decision-Making
Another disappointing update on inflation could sway the minds of Federal Reserve policymakers towards another interest rate hike, providing support for those who argue that more action is necessary to restore price stability.According to figures released by the Commerce Department on Friday, the personal consumption expenditures price index, which is the Fed's preferred measure of inflation, experienced a faster-than-anticipated increase of 0.4% in April.Cleveland Fed President Loretta Mester expressed her view on the matter in an interview with CNBC later that day, stating, "When I analyze the data and observe the inflation numbers, I believe we will have to implement further tightening. All possibilities are being considered for June."In comparison to the previous month, the measure rose by 4.4% over the past year, slightly surpassing the 4.2% growth. Excluding food and energy, the core PCE index, often referred to as the core inflation rate, saw a 0.4% rise from the previous month and a 4.7% increase from April 2022.Diane Swonk, chief economist at KPMG LLP, expressed concern about the Fed's direction, stating, "This is not the right path for the Fed. The outcome in June will depend on resolving the debt ceiling issues, but a rate hike in July is now a possibility."Over the past 14 months, officials have raised rates by 5 percentage points in an attempt to control inflation, which has exceeded their target of 2%. Following a quarter-point increase earlier this month, the benchmark rate now stands at a target range of 5% to 5.25%. Fed Chair Jerome Powell stated a week ago that policymakers could afford to monitor the data and the changing economic outlook.Before the next meeting of the Federal Open Market Committee on June 13-14, policymakers will receive additional data on employment and consumer prices. They may also hesitate to raise rates as long as there is uncertainty surrounding the outcome of the debt ceiling negotiations in Congress.However, investors have started to increase their expectations of a rate hike next month to over 50%, up from 18% just a week ago. This shift in sentiment is driven by recent hawkish speeches by Fed officials, as well as signs of economic strength. The report on Friday revealed that consumer spending, adjusted for prices, experienced a 0.5% increase, marking the strongest growth since the beginning of the year. Following the release of the report, Treasury yields saw a significant rise.
Discussion