June 14 (UPI) — The Federal Reserve on Wednesday pumped the brakes on additional rate increases, for now, following something of a neutral report on consumer-level inflation in the U.S. economy.
© Ken Cedeno/UPI
Federal Reserve Chairman Jerome Powell is expected to make no change to interest rate policies on Wednesday, despite so-called core inflation running higher than expected. Core inflation increased by at 5.3% over the 12-month period to May, File photo by Ken Cedeno/UPI
The Federal Open Market Committee will keep benchmark interest rates at 5% to 5.25%, marking the second time this year that it did not raise interest rates following a meeting. It also left interest rates alone in January.
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In a press release, the FOMC said job gains have been “robust” in recent months while unemployment rates have remained low. Inflation is still high, but the committee “seeks to achieve maximum employment and inflation at the rate of 2% over the longer run.”
“Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the press release stated.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Published on May 31, the so-called Beige Book, a summary of economic conditions across the 12 Federal Reserve districts, showed that optimism on future growth declined somewhat, though consumers were still spending more on leisure and hospitality.
“Financial conditions were stable or somewhat tighter in most districts,” the report added.
The Fed has battled high inflation for the better part of a year with successive rate hikes that are designed to make borrowing prohibitive enough to dampen demand and pull consumer-level prices lower.
Year-on-year inflation to June 2022 hit 9.1%, the largest increase in more than 40 years. Much of the strain came as a result of the war in Ukraine as sanctions targeting Russian oil and natural gas upended the global energy sector.
Inflation is subsiding, though nearly a year later, investment bank ING finds things such as housing costs and vehicle prices “continue to run hot.”
The shelter component of the Consumer Price Index, published Tuesday, was up 8% over the 12-month period to May, while the price for a new car is up 4.7% annually. Total consumer-level inflation came in at 4% over the 12-month period to May, a 0.9% contraction from the annual period to April.
Volatile items such as food and energy contributed most to the decline.
The price for Brent crude oil, the global benchmark for the price of oil, reached $129.20 per barrel in early June 2022, the same month as record-level inflation. Brent was trading closer to $74.50 per barrel on Tuesday.
“We have taken action to bring down the cost of gas at the pump, prescription drugs and health insurance premiums,” President Joe Biden said in remarks on the latest read on inflation. “At the same time, the unemployment rate has remained below 4% for the longest stretch in more than 50 years, helping to support wage gains over the last year, even after accounting for inflation.”
Employment, however, is a concern for the Federal Reserve as steady wages can support inflation. The Fed is presented with a careful balancing act with rate hikes, trying to both cool the economy and avoid a recession that would see widespread layoffs.
During the week ending June 3, the number of people filing initial claims for unemployment insurance reached its highest level since October 2021.
Olivia Cross at Capital Economics in London told UPI that if hiring shows some level of resilience over the coming weeks, it’s possible the Fed will hike rates by 25 basis points in July, though she’s expecting a pause this week.
“We are expecting a ‘hawkish pause’ from the Fed as officials leave interest rates unchanged to observe the path of incoming data,” she said.
A monetary hawk favors tight monetary policies in an effort to control inflation, while doves prefer to focus on supporting the labor market.
Lorie Logan, a hawk who is also the newest voting member at the Fed and the first woman to sit as president of the Federal Reserve Bank of Dallas, said last month that “inflation remains much too high.”
Logan in May said that the slowdown in consumer-level inflation was largely a result of trends in the commodity sector, where crude oil prices are currently about 40% below year-ago levels.
But stripping out volatile food and energy prices to yield core inflation shows pressures remain entrenched. Core inflation increased by 5.3% over the 12-month period to May.
Investment bank ING viewed the latest data on CPI as “neutral,” even though core inflation came in a bit higher than expected.
“This should cement expectations for the Fed to keep rates unchanged tomorrow but the commentary around the decision is likely to remain hawkish,” ING’s chief international economist James Knightly said.
OANDA market analyst Craig Erlam told UPI he also expects a “hawkish hold” from the central bank on Wednesday but said another hike could be on the horizon.
“Some of the recent data looks much more promising even if other bits will leave policymakers feeling a little uneasy,” Erlam said. “It will probably not be unanimous, which will leave a hike in July very much on the table but by then I expect the data will enable them to draw a line under this tightening cycle.”