– They Echo Call For ‘Confidence’ Inflation Headed ‘Sustainably’ To 2%
By Steven K. Beckner
(MaceNews) – A barrage of comments from Federal Reserve officials this week has served to reinforce the Fed’s reluctance to ease monetary policy until greater confidence is gained that inflation is on its way down to the Fed’s 2% target on a sustainable basis.
On Tuesday alone, no less than five officials made remarks which reflected a high degree of consensus, at least for the time being, that the Fed needs to proceed cautiously before beginning to lower short-term interest rates.
Even officials who are ordinarily thought of as being “dovish” signaled that they will not be ready to support reducing the federal funds rate until they see more convincing evidence that inflation is headed to 2%t.
Richmond Federal Reserve Bank President Thomas Barkin, a voting member of the Fed’s policy making Federal Open Market Committee, was agnostic about when the FOMC might start cutting rates, outlining three possible economic scenarios that would require different policy responses. But he implied rate cuts are some ways off by saying it will take longer than many think to “put the inflation genie back in the bottle.”
Fed Governor Adriana Kugler expressed optimism about further disinflation, but said the Fed has “more work to do” and said she needs to see “more progress” towards 2% inflation before she would support rate cuts – perhaps “later this year.”
New St. Louis Fed President Alberto Musalem said he needs to observe “a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate.”
Dallas Fed President Lorie Logan said the FOMC needs to be “patient” about easing policy and wait for more favorable inflation data.
Chicago Fed President Austan Goolsbee was upbeat about April and May inflation data, but he too said the Fed needs more such data before it can lower rates.
Boston Fed President Susan Collins called the latest inflation data “encouraging,” but said the outlook remains “uncertain” and counseled “patience” in deciding when to shift monetary policy.
The officials’ comments come less than a week after the FOMC voted unanimously to hold the federal funds rate steady in a 5.25% to 5.50% target range, while repeating it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
FOMC participants projected just one 25 basis point rate cut this year to a median 5.1% — down from the three cuts projected in March and the six Wall Street was looking for prior to a series of disappointing first quarter inflation numbers.
The FOMC decision came despite a somewhat improved May consumer price index report.
Thanks to a sizable drop in gas prices, the overall CPI was flat, but was up 3.3% from a year earlier. The core CPI rose 0.2% and 3.4% year over year.
The FOMC policy statement acknowledged “modest further progress,” and Fed Chairman Jerome Powell called the CPI report “encouraging,” but said more such data before it can gain sufficient “confidence” to consider cutting rates.
Barkin said he believes “we’re on the backside” of the post-pandemic inflation flare-up, but made clear he is not prepared to assume that the Fed has put above-target inflation behind it.
“I’m definitely one of those people who think that when you let the inflation genie out of the bottle it permeates and it requires a lot more than just slapping at it to get it back in the bottle,” he said in an MNI webcast. “And so I think that’s happened, and that’s what we’re doing.”
“If you had imagined that this was all just supply side, the first quarter would have told you there’s still something out there,” he continued. “And so we’ve let the inflation genie out of the bottle. I think we’re putting it back in, but it’s a slower process than most people think.….”
Barkin refused to be drawn into speculation about how soon or at what meeting the FOMC might begin to lower the funds rate, saying it will depend on how the data evolve and which of three different economic scenarios unfolds.
In one scenario, inflation resumes declining as it did in the second half of 2023; in a second scenario, inflation surges as it did in the first quarter of 2024, while the economy remains strong, and in a third, inflation moderates along with growth as it did in April and May.
Each of those scenarios has its advocates, noted Barkin, but he said, “That’s not where I am.”
“We will learn a lot more in the next several months,” he said, adding, “we’re well positioned to act,” depending on the data.
For now, Barkin said he needs to see “broadening and sustainment” of progress against inflation, noting that while goods prices have come under control, prices for services and housing have not.
While firms tell him they no longer have “pricing power” to raise goods prices, he said service providers are still trying to raise prices.
“I certainly didn’t get more confidence from the first quarter” inflation data, Barkin said.
Should the economy and labor markets weaken, he said the Fed would have to adjust rates lower, but he also didn’t rule out the possibility that rates might have to go higher.
“I’m always openminded,” he said. “You’ve got to adjust rates based on what you learn; if what you learn is overheating,” the FOMC must adjust rates higher, but if the economy is weakening, it must adjust rates lower.
“The hard part is knowing where you are,” he added.
Barkin emphasized that neither he nor his FOMC colleagues are bound by the SEP “dot plot” of funds rate projections. “it’s a forecast, not a commitment.”
He said he has “a strong sense that we are at a restrictive level,” as evidenced by slowing growth and moderating inflation, but said “there’s a fair question about how restrictive, because the economy has plugged along quite nicely although policy is restrictive.”
He said he has “a lot of empathy” for arguments that real interest rates and in turn the “neutral” funds rate has risen.
Part of the Fed’s problem in its attempt to cool inflation with “restrictive” monetary policy, he said, is that “fiscal spending has leaned against monetary policy.” And he said, “very healthy” financial markets have also “leaned against that policy.”
Barkin’s predecessor Jeffrey Lacker, meanwhile, says the Fed may have no choice but to leave rates unchanged not just through 2024 but through 2025 as well.
Kugler said she was “encouraged by some of the details of the recent reports, particularly the continued improvement in market-based services inflation.” But she said, “inflation is still too high, and further progress is likely to be gradual.”
She listed a number of reasons to be optimistic that “improving supply and cooling demand will support continued disinflation.” She said, consumers are becoming “more price sensitive” and resistant to price increases, and she said firms in turn are becoming “increasingly attentive to consumers pushing back against additional price increases.”
Kugler also cited “slower growth in the costs faced by businesses.” In particular, “nominal wage growth has continued to trend down, consistent with a labor market where supply and demand are coming into better balance…. If this moderation in wage growth continues, it will soon be at levels consistent with price stability.”
Along with “easing” labor market tightness and “signs of gradual cooling and continued wage moderation,” she said she is “cautiously optimistic about productivity growth.”
Finally, she said, “the current stance of monetary policy is sufficiently restrictive to help cool the economy and bring inflation back toward 2% without a sharp contraction in economic activity or a significant deterioration of the labor market.”
She said the effects of restrictive financial conditions are “apparent in interest rate–sensitive sectors” and “are also evident in labor markets.”
Despite Kugler’s optimism, she expressed concern about various risks, particularly with regard to inflation, that make her hesitant to ease policy soon.
“While I remain cautiously optimistic that inflation is coming down, it is still too high, and it is moving down only slowly,” she said. “I believe that policy has more work to do, which is why I supported the FOMC’s decision last week to keep the federal funds rate in a range of 5-1/4 to 5-1/2 percent.”
“We need to see more progress toward 2 percent inflation before I will have confidence that inflation is moving sustainably toward that objective…,” Kugler added.
“I believe economic conditions are moving in the right direction,” she continued. “If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year. But, as always, my judgment will be guided by the data.”
Musalem, in his first public speech since succeeding James Bullard as St. Louis Fed president in April, said there has been “substantial progress toward the Fed’s dual mandate goals of stable prices and maximum employment.”
Despite the “weaker than expected” May retail sales reported Tuesday morning, he said “economic activity has continued to expand at a solid pace underpinned by robust demand, especially in services.”
He discounted slower estimates of first-quarter real GDP growth, saying they were “largely reflected declines in inventory investment and net exports, which are notoriously volatile.”
Musalem said the labor market is “no longer overheated,” but “remains tight.”
As for inflation, he was loathe to make too much of April and May reports. “There are potential early signs of continued progress on inflation…,” he said. “Favorable national reports on consumer and producer prices suggest the monthly reading for the personal consumption expenditures price index, or PCE price index, should show a welcome downshift of inflation in May. I am hopeful this could mark a resumption of progress toward 2 percent inflation.”
“However,” Musalem added, “it takes more than one data point to establish a trend. Data for the first four months of 2024 indicated that inflation remained too high and was moving more sideways than down.”
“Moreover, recent elevated readings on PCE inflation have been broad-based across expenditure categories of goods and services,” he continued.
So, Musalem suggested that monetary policy needs to stay where it is for an indefinitely longer period.
“The current policy posture balances the risk of easing policy too early with the risk of easing policy too late,” he said. “It allows the Committee to patiently observe economic developments going forward.”
Musalem said he “will need to observe a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate. These conditions could take months, and more likely quarters to play out.”
He said the FOMC statement that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent” gives the FOMC “an option to ease policy in the more likely scenario of achieving confidence that inflation can be expected to converge to 2 percent.”
But Musalem said that, if necessary, he “would support an additional firming of monetary policy.”
“To be clear, I do not view inflation as “getting stuck” or “rising” as the most likely scenarios,” he elaborated. “But it is prudent to plan for and communicate about plausible scenarios that could play out.
“If progress toward achieving 2 percent inflation stalls or reverses, I believe it would be appropriate for the Committee to act promptly to ensure that high inflation does not become entrenched,” he added.
Logan took a similar line.
“”We’re going to need to see several more months of that data to really have confidence in our outlook that we’re heading to 2%,” she said in Austin, Texas. “We’re in a good position, we’re in a flexible position to watch the data and to be patient.”
“I think there are still some upside risks to inflation that we have to keep our eyes on,” she added.
Goolsbee, ordinarily thought of as being on the dovish side of the policy spectrum, was more hopeful about inflation than others but no less committed to doing what is necessary to get inflation down to 2%
Calling the CPI report “very good” and “a small number,” he said, “Inflation was back down to levels that, if we got a lot of numbers like this, we would feel so much better (about) getting inflation to the Fed’s target rate of 2%.”
But Goolsbee added, “At the same time, one month is no month. We’ve got to have more months than that .…”
“Over 18 months we have actually made a lot of progress getting the inflation rate down …,” he went on. “Inflation has come down without getting a recession, and that’s the goal.”
But “we’ve just got to see more progress,” he said.
Declining to say whether the FOMC could cut rates in September or November, Goolsbee said, “I don’t like tying our hands …. We’ll get a lot of data before then … that makes the decision obvious.”
Goolsbee said the FOMC has been successful with the “maximum employment” side of its dual mandate, but said “the failure has been on the inflation side of the mandate.”
“In the near to medium term that will determine if rates go back to something like normal,” he continued. “If inflation is on a path back to 2%, if it is we can see the rat es go down.”
Goolsbee said the FOMC rate forecasts and rate projections showed a consensus that “as inflation comes down, rates will come down to something less restrictive than now.”
But he emphasized, “inflation’s got to come down … if inflation comes down it’s straightforward (cut rates). If inflation doesn’t come down we’ve got to work through that.”
Goolsbee, like others, ruled out raising the Fed’s inflation target and asserted, “We’re going to get to 2% I’m telling you.”
“We’ve got to get inflation down,” he declared, adding, “I feel like we’re on a path to 2%. If we get more months like we just saw we can afford for rates to come down .…”
But Goolsbee warned, “if (the inflation progress) doesn’t continue all bets are off. We’ll have a hard time cutting rates.”
Meanwhile, he pointed to signs that “pain is rising in various parts of the economy — not to levels that one would associate with recession, but they’ve definitely been rising.. The other side of the mandate is definitely coming into view.. we have to look at that too.”
Collins, likewise, took a cautious, balanced approach. “I see recent information as encouraging, after the string of higher-than expected inflation readings during the first quarter of 2024,” she said. “In my view, the data suggest an economy with demand and supply coming into better balance, as required to restore price stability.”
“However,” she added, “this process may just take more time than previously thought. It is too soon to determine whether inflation is durably on a path back to the 2% target.”
“Uncertainty remains high – and the volatility of monthly data remains elevated, including for inflation,” Collins went on. “We should not overreact to a month or two of promising news, just as it was not appropriate to take too much signal from the disappointing data at the beginning of this year.”
She called herself “a realistic optimist – optimistic that we can restore price stability in a reasonable amount of time amid a labor market that remains healthy, while realistic about the risks and uncertainties to that outlook.”
So Collins said “the appropriate approach to monetary policy continues to require patience, providing time for a methodical and holistic assessment of the evolving constellation of available data.”
Before Tuesday, other Fed officials had also sounded notes of caution, if not trepidation.
On Sunday, Minneapolis Fed President Neel Kashkari told CBS’ “Face the Nation” program, “We need to see more evidence to convince us that inflation is well on our way back down to 2%.”
Kashkari, who has been on the hawkish side of the FOMC spectrum lately, said “we’re in a very good position right now to take our time, get more inflation data, get more data on the economy, on the labor market, before we have to make any decisions. We’re in a strong position, but if you just said there’s going to be one cut, which is what the median indicated, that would likely be toward the end of the year.”
He called a December rate cut “a reasonable prediction.”
Philadelphia Fed President Patrick Harker, who has earned more of a dovish reputation over the past year, didn’t sound a lot different on Monday. He welcomed modest improvement in the CPI but made clear he too needs to see a lot more to justify rate cutting. He said the FOMC could either cut rates twice or not at all, depending on the data.
“( T)he latest inflation data have been quite promising that progress on disinflation has resumed,” he said. “But ‘promising’ falls short of the confidence I want to have, before cutting rates, that inflation is on a sustainable path back to target ….”
Harker said the current funds rate “will continue to serve us well for a bit longer, holding us in restrictive territory to bring inflation back to target and mitigate upside risks.”
He said he’ll be watching the data to determine “whether it is, or is not, the right time to decrease the policy interest rate. When that time will be, exactly, I don’t yet know. I have a forecast for inflation, employment, and economic activity: slowing but above trend growth, a modest rise in the unemployment rate, and a long glide back to target for inflation.”
“(I)f all of it happens to be as forecast, I think one rate cut would be appropriate by year’s end,” Harker said, but he added that either two rate cuts or no rate cuts is “quite possible.”