By Howard Schneider
WASHINGTON (Reuters) -Federal Reserve Vice Chair Philip Jefferson, in remarks that skirted any mention of interest rate cuts, said the U.S. central bank was ready to keep its tight monetary policy in place if inflation fails to slow as expected.
Opening a day of updated messaging from the central bank’s leadership, with Fed Chair Jerome Powell due to speak at a forum at 1:15 p.m. EDT (1715 GMT), Jefferson’s remarks to a Fed research conference excluded key phrases about gaining “confidence” in lower inflation and then cutting rates, but noted the central bank was facing a strong economy and little recent progress on the pace of price increases.
Fed staff estimates that Jefferson released, in fact, indicate March will be another lost month for policymakers, with the personal consumption expenditures price index expected to have risen at a 2.7% annual rate versus 2.5% in the prior month.
“My baseline outlook continues to be that inflation will decline further, with the policy rate held steady at its current level, and that the labor market will remain strong, with labor demand and supply continuing to rebalance,” Jefferson said in remarks to a Fed research conference in Washington.
But “if incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer. I am fully committed to getting inflation back to 2%.”
In his last public remarks, on Feb. 22, Jefferson included what had been a staple of recent Fed communications – that “if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back our policy restraint later this year,” a nod to the possibility of reducing the Fed’s benchmark overnight interest rate from the current 5.25%-5.50% range to account for a slowing pace of price increases.
Whether or not Powell follows in a similar vein, outside analysts and investors have been steadily marking down the likelihood and timing of Fed rate cuts as policymakers struggle to reconcile a gravity-defying economy with their assessment that monetary policy is “restrictive” and inflation likely on its way down.
Both of those ideas have been called into question by job growth, retail spending, inflation and other data that continue to challenge the Fed’s sense that the economy was gliding towards lower demand, slower growth, and price increases nearing the central bank’s 2% target.
Powell told a U.S. Senate panel just over five weeks ago that the Fed was “not far” from gaining the confidence in falling inflation needed to cut interest rates, but policymakers, investors and outside analysts have lost a bit of faith in that outlook since.
In the days just after Powell’s congressional testimony, futures contracts tied to the Fed’s policy rate reflected an initial quarter-percentage-point rate cut as likely to occur at the central bank’s June 11-12 meeting, with two more reductions in borrowing costs by the end of 2024. Now the first cut is seen in September, and the odds of even a second cut were falling after the U.S. government reported on Monday a 0.7% rise in retail sales in March that exceeded expectations in a Reuters poll of economists.
“This is another clear sign of the resilience of the U.S. consumer, which we think will keep growth strong this year and adds to the risks that the Federal Reserve will delay its first rate cut beyond June,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a note. “We still expect Fed officials to lower rates later this year, but that will be justified by renewed signs of moderating inflation later this year, rather than fears the economy is about to weaken dramatically.”
‘LAST MILE’
“Patience” is likely to remain the watchword.
When inflation was in fast decline last year, Powell was reluctant to declare the fight against it won even as policymakers laid the groundwork for rate reductions beginning this year.
Officials at the Fed’s March 19-20 meeting said they still expected to cut the policy rate by three-quarters of a percentage point by the end of 2024. Powell at the time said disappointing inflation data in January and February “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2%.”
Yet the bumps continued through March, enough so that some officials at the last Fed meeting worried that monetary policy was not having the sort of impact that would be typically expected from the highest interest rates in a quarter of a century.
Data since then have shown a massive 303,000 jobs were added in March, the pace of consumer price increases accelerated, and even low-income households continued to spend.
The strength of the economy, policymakers suggest, is one reason they could wait to cut rates and be sure inflation will resume its decline.
“This question of the last mile is a little harder,” with progress slowing as the Fed gets closer to its inflation target, Chicago Fed President Austan Goolsbee said on Friday. “If we see that inflation is on this path back down to 2%, then … do we want to remain as restrictive as we are right now for a prolonged period? If inflation doesn’t come down. That answers it for us.”