MNI FED WATCH: On Hold, Waiting Longer For Inflation To Recede

The Federal Reserve is expected to hold rates at 5.25%-5.5% for a sixth meeting at next week's May FOMC while acknowledging it will take longer to gain the confidence needed to cut borrowing costs later this year.

The case for a series of cuts in 2024 is weakening after three months of firmer-than-expected inflation data, and officials are likely to push back the timing of the first move to close to the end of the year, former Fed officials told MNI. (See: MNI INTERVIEW: Fed Cuts Likely Delayed Till November -Lockhart and MNI INTERVIEW: Risk Next Fed Move Is A Rate Increase - English)

At its March meeting, the 19-member FOMC was nearly evenly split between forecasting three and two-or-fewer cuts. Since then, core CPI posted a third straight 0.4% increase in March and the three-month annualized core non-housing services, or supercore, category jumped to over 8%. The Fed's preferred PCE inflation measure is running lower than CPI but has also heated up since the start of the year.

Three-month annualized core PCE inflation accelerated to 4.4% compared to the 12-month rate of 2.8%, according to Bureau of Economic Analysis data Friday.

“The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence," Fed Chair Jerome Powell said last week. "That said, we think policy is well positioned to handle the risks that we face. If higher inflation does persist, we can maintain the current level of restriction for as long as needed."

HOW RESTRICTIVE

Futures traders are now pricing in less than 50 bps of easing by the end of the year, and Powell is expected to face questions on how much the FOMC will revise its projections, and whether a potential rate hike could be warranted.

A number of Fed officials have also questioned whether monetary policy is as restrictive as previously thought. Former Dallas Fed President Robert Kaplan told MNI services inflation will run hot as long as loose fiscal policy continues to boost spending.

A resilient U.S. economy and still-tight labor market come as good news for the Fed, but raise questions about the restrictiveness of the policy stance and broader financial conditions, Boston Fed President Susan Collins said on April 11.

The Fed has "significant space to ease" should the labor market unexpectedly weaken, Powell said last week. "Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work."

QT CHANGES

The May FOMC statement could include changes to the Fed's quantitative tightening plan. Powell said in March that a tapering of runoffs will come "fairly soon" so as to avoid unnecessary frictions in money markets and enable QT to continue for longer.

Minutes of the March meeting said participants generally favored reducing the monthly USD95 billion pace of runoff by roughly half while maintaining the USD35 billion cap for mortgage securities. Analysts generally expect the cap for Treasuries redemptions to fall to roughly USD30 billion a month starting in either May or June.