MNI INTERVIEW: Fed Poised For Higher For Longer Stance - S&P

Inflation is still far from the Federal Reserve's 2% target, recent data show, meaning interest rates are likely to stay higher for longer and a reduction in borrowing costs is unlikely until the end of the year, S&P Global Ratings Chief U.S. Economist Satyam Panday told MNI.

"This does leave the Federal Reserve to pause for longer and the probability of the first rate cut does move back" to the end of the year, he said in an interview.

The Commerce Department reported Friday core PCE inflation accelerated to 2.8% for the year, while core PCE annualized inflation reached 4.4% over the last 3 months and 3.0% over the last six months. Markets were relieved that the month-over-month increase at 0.3% was not as big as feared.

"Inflation numbers really accelerated in the first quarter of this year," Panday said. This week's inflation data "changes the overall inflation forecasts for the Fed. It would mean that they would have to get in the next few months at a 2% annualized rate or under a 2% annualized rate on a month-to-month basis to get to that 2.6% pace [from the March SEP] at the end of the year. I don't think they are on track."

Still, Panday suggested there are likely some transitory factors in the recent high inflation numbers, just as there were some in the low inflation late last year. The current reacceleration is likely a temporary deviation from its underlying trend, he added.

"We are going to see things getting back down to 2% but its going to take this longer path. It was going to be a bumpy path with the last mile and it seems like that is going to be the case," he said, pointing in part to loose fiscal policy. (See MNI INTERVIEW: Kaplan Says Loose Fiscal Is Holding Up Fed Cut)

MODERATING DEMAND

Consumer spending should continue to do the bulk of the work in terms of GDP growth, but labor markets, wage growth, and consumer expenditures will moderate and move down toward a longer run long run steady state, Panday said. Consumers have been doing the heavy-lifting and driving growth but there has been a continuation in the rotation of spending away from goods toward services.

"We think that it'll probably continue for another quarter or so until we get back to the normal trend that we have been expecting," he said. "Service spending is still going through this catch up growth after the pandemic." Real personal income excluding government transfer payments reached a new all-time high in March.

Panday said long-term neutral interest rates have likely moved higher since the last economic expansion, probably to around 3%. "I can see that at least in the near term, it may be a little bit higher than that given how the economy is doing." (See: MNI INTERVIEW: Fed Only Likely To Cut Once This Year- Giannoni)

"The bar for a rate hike is still quite high at the moment," Panday said. "That means that most likely we are not going to have the Fed be confident enough to start cutting rates in the summer."