Stubborn inflation will encourage rates to stay high for a long time

Investors are abandoning dreams of an immediate rate cut as inflation remains stubborn, prompting Federal Reserve policymakers to keep borrowing costs higher for longer.

The latest reading of the central bank's closely-watched inflation measure, released on Friday, showed price increases running significantly faster than the central bank's 2 percent target.

Personal consumption expenditures index It was 2.7 per cent higher in March than the previous year's 2.5 per cent in February. Inflation was steady at 2.8 per cent year-on-year after stripping out volatile food and fuel prices to give a clear reading of price trends.

The report is the latest sign that after months of steady growth in 2023, progress in cooling inflation may stall in 2024. The unexpected roadblock has policymakers, economists and investors questioning how soon and how much the central bank can do. Reduce borrowing costs. Federal Reserve Chairman Jerome H. Powell signaled last week that central bankers may not see the improvement they expect before cutting rates.

The Fed meets in Washington next week to discuss its next rate move. Interest rates are widely expected to remain unchanged at their May 1 end, with investors looking to Mr. A news conference with Powell will be closely watched. If inflation continues to stick around in the coming months, it could prompt authorities to keep interest rates at their current relatively high levels for longer as they try to put the brakes on the economy and curb inflation more fully.

“There's a lot of uncertainty in the path of inflation,” said Matthew Luszetti, chief U.S. economist at Deutsche Bank, noting that “you continue to see an economy that's pretty well down.”

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Policymakers have raised interest rates to 5.33 percent between March 2022 and last summer. They think it's enough to eventually weigh on the economy – in economics parlance, it's “controlled”.

But some economists have begun to question how restrictive the central bank's current rate setting is, given that growth has been solid and hiring has been brisk even after relatively high rates.

Data released Friday showed momentum continued in March: Consumer spending rose 0.8 percent for the second month in a row, ahead of forecasters' expectations. That spending is supported by a strong market that is boosting wages: Americans' after-tax income in March significantly outpaced inflation for the first time since December.

Divide the data from a University of Michigan study Friday showed consumers were slightly more pessimistic in April about the outlook for both the overall economy and inflation in particular.

Stock indexes rose on Friday morning as Wall Street shrugged off a slightly bleaker inflation report after data released Thursday suggested price gains in March may have been warmer than personal consumption spending figures showed.

Silver's figures “can be viewed with a sigh of relief,” Omair Sharif, founder of Inflation Insights, wrote in a note following the report.

Even so, investors see more opportunity for longer-term higher rates than they did a month or a week ago — which can drive stock prices lower. Investors are now betting that the central bank could make its first move in September or later. Based on market price. A small but growing share thinks the Fed won't cut rates this year.

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Given the economy's momentum, some economists are even wondering whether central bank officials might start thinking about raising rates again.

Fed Governor Michelle Bowman It has already been said While that was not his “fundamental view”, he saw “a risk that we may have to raise the policy rate further in a future meeting”.

While markets decide whether rates will be hiked again, the central bank is more likely to keep them at higher levels for a longer period of time, D. said Blerina Urucci, chief US economist at Rowe Price.

He said it would take an absolute acceleration in inflation to prompt the central bank to raise borrowing costs again, rather than the stagnant progress seen in recent months.

“I don't think we're at the point where we need to talk about raising interest rates this year,” Ms. Urucci said. “But we're definitely at the point where we're talking about fewer cuts.”

Many economists think inflation could fall further as cooler new rental prices feed into official inflation data which is still slow. But the process is taking longer than many expected, and with the economy more stable, the risk that inflation may be fixed has grown.

Additionally, economists have continued to find their forecasts for inflation marred by economic surprises in recent years: It wasn't expected to rise as quickly as it had in 2021 and 2022, and then it fell slightly faster than many expected late last year. Now, its flatline is amazing.

“After all these years, you have to be humble,” Mr. Lucetti said.

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High interest rates are meant to curb inflation by discouraging consumers and businesses from spending. That appears to have happened to some extent: Higher mortgage rates led to a sharp slowdown in the housing market, and businesses pulled back capital investments and posted fewer job openings.

But the economy as a whole has proven remarkably resilient to the effects of higher borrowing costs. Consumers are particularly unsettled, choosing to reduce savings and rack up credit card debt even as they complain about high prices. Americans saved just 3.2 percent of their after-tax income in March, the lowest rate since 2022.

At Portland Gear, a Portland-based apparel retailer, sales continue to hit records as customers snap up $79 sweatshirts and $36 baseball caps, company founder Marcus Harvey said.

“Consumers may say things are expensive, but their buying habits don't really say that,” he said.

As a result, despite high interest rates, Mr. Harvey continues to invest. The company recently opened a flagship store in downtown Portland and is opening a location at the city's airport.

“What it is: For the next five years, rates are going to be higher,” Mr. Harvey said. “There's nothing you can do about it. Business will go on. Life will go on.”

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