MNI FED WATCH: Awaiting Further Evidence, Keeping Easing Bias
MNI looks ahead to the FOMC June meeting.
The Federal Reserve is expected to hold rates at 5.25%-5.5% for a seventh meeting at next week's June FOMC while acknowledging it will take longer to gain the confidence needed to lower borrowing costs later this year.
The central bank's preferred measure of inflation eased in April after coming in hot for three consecutive months. Employers added 272,000 workers in May, far above trend estimates. The Dallas Fed's trimmed mean measure of PCE inflation has declined for twelve straight months to 2.94% in April, lower than the six-month annualized rate of 3.05%.
Several former Fed officials and economists told MNI the central bank will wait longer to start an easing cycle, especially in light of robust growth and solid employment data, although cuts are still on the table this year.
RESTRICTIVE RATES
The core leadership of the FOMC believes a 23-year high fed funds rate is providing enough restraint on the economy to bring inflation down to target while loosening labor markets, but a number of Fed officials are worried monetary conditions might still be insufficiently restrictive. (See: MNI POLICY: Fed Officials Clash On Extent Of Rate Restraint)
The robust economic backdrop gives policymakers additional reason to wait. Fed officials have said although another rate rise is not their baseline, the option can not be taken off the table completely. (See: MNI INTERVIEW: Fed’s Next Move Could Still Be A Hike - Posen)
Fed economists have found in research the "last mile" of bringing inflation down to 2% is much costlier than the road traveled thus far, in which he frequency of price increases is helping to drive inflation.
Wage growth is also still running above levels consistent with 2% inflation, with average hourly earnings up 4.1% over the last year to May. The unemployment rate rose to 4% from 3.9%. It’s the first time in 27 months that the jobless rate is not below 4%. Five months into the year, payroll increases have averaged 248,000, close to the 2023 average.
Ex-IMF chief economist Olivier Blanchard told MNI the economy and job market are likely still too strong for the Fed to be able to begin cutting interest rates soon, but monetary policy, although working against generous fiscal policy, is working.
MIXED DATA
The Fed will be updating its forecasts in the quarterly of Summary of Economic Projections, which is expected to show slower growth and slower disinflation. At its March meeting, the 19-member FOMC split between nine members forecasting three rate cuts this year and nine members expecting two-or-fewer cuts. Since then, Fed officials have pulled back rate cut expectations as inflation came in hot. Markets are pricing in about one and half rate cuts through the end of the year.
Data in recent weeks have been mixed. Job openings in America have dropped by over 750,000 in two months to April and now the ratio of job openings to unemployed has declined to 1.24, which is the top of the range seen in 2018-2019. But job growth and wages are expected to remain firm, and ISM's manufacturing and services indexes have diverged.
With the uncertainty, Fed officials have dropped what had been explicit guidance about the likelihood of interest rate cuts this year and focused on discussing different economic scenarios. (See: MNI INTERVIEW: Fed's Average Inflation Target Loses Its Luster)