Has the disinflation process stalled?
The latest inflation data is not what Federal Reserve officials were hoping for. The Personal Consumer Expenditure Price Index (PCEPI), which is the Fed’s preferred measure of inflation, rose at a constant compounding rate of 4.2 percent annually from April 2022 to April 2023, compared with 4.1 percent in the twelve-month period ending in March. 2023 The PCEPI has risen 4.1% annually since January 2020, just before the pandemic. Prices are 7.7 percentage points higher today than they would have been had the Fed hit its 2 percent target over this period.
Core inflation, which rules out food and energy price volatility and is considered the best predictor of future inflation, also remained high. Underlying PCEPI rose 4.6 percent from April 2022 to April 2023, compared with 4.5 percent in the twelve-month period ending March 2023. Underlying PCEPI has grown 3.8 percent annually since January 2020 and is now 6.5 percentage points above its growth target. expected before the pandemic.
Fed officials may worry that the process of disinflation has stalled. For this reason, recent data is likely to increase uncertainty about the future course of monetary policy.
The Federal Open Market Committee raised its target range for federal funds rates to 5.0-5.25% earlier this month, the tenth increase in fifteen months, but signaled that it could put a hold on rate hikes in June. Back in MarchThe FOMC said it expects “some additional policy strengthening may be appropriate.” This statement was revised at the May meetingwhen the FOMC said it would “take into account cumulative monetary tightening, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” to determine “the extent to which additional monetary tightening may it would be expedient to bring inflation back to 2 percent over time.”
Since the last meeting, FOMC members have expressed conflicting views.
Some FOMC members, including Chairman Powell, continue to propose a pause. “Until recently” Powell told those present at a recent Fed conference “it was clear that further policy tightening would be required. As policies become more restrictive, the risks of doing too much and too little become more balanced, and our policy has been adjusted to reflect this fact. We have not made any decisions about how appropriate further policy strengthening is, but given how far we have come […] we can afford to look at the data and emerging perspectives and make careful assessments.”
Governor Philip Jefferson proposed similarly. that a pause might be appropriate. “History shows that monetary policy works with large and variable lags, and that a year is not long enough for demand to feel the full effect of higher interest rates. Another factor influencing my thoughts is the uncertainty around the tighter lending standards I mentioned earlier.”
Other FOMC members have hinted at rate cuts in the not too distant future. “You don’t land a plane nose down,” Chicago Fed President Austen Goolsby told The New York Times columnist Gina Smialek earlier this month. “When you come in to land, you have to soften the blow a little.”
Still others suggest that the FOMC has not gone far enough. Minneapolis Federal Reserve Bank President Neil Kashkari pointed out that he would “rather err on the side of being more hawkish than regret it and be too dovish” because the cost of not allowing inflation to fall to 2 percent for Main Street is much higher than the cost of lowering it. up to 2%.
Dallas Fed President Lori Logan left room for a pause, but also suggested that rates would likely need to rise. “Data in the coming weeks may show that it is appropriate to skip the meeting,” she said, “although we have not reached that point yet.”
Gov. Waller expressed a similar “skip then boost” view. “If one is sufficiently concerned about this downside risk, then prudent risk management will suggest skipping the increase in the June meeting, but leaning towards the increase in July based on incoming inflation data,” he said.
The latest inflation data is unlikely to ease the worries of Kashkari, Logan and Waller. But how far has that shifted the needle, especially among those FOMC members who previously seemed more committed to the pause? With one vacancy, six votes are currently required to make a decision.
CME group suggests that the needle has shifted significantly. There is currently a 53.9% chance of a rate hike in June compared to 17.4% a week ago.