Tuesday is the day when the meeting of officials from the Federal Reserve begins. Due to the persistent nature of inflation, it is commonly anticipated that they will maintain interest rates at their present levels.
The famed baseball instructor and player Frank Robinson once observed, “Close only counts in horseshoes and hand grenades.” Robinson was a legendary figure in the sport. Those are the principles that the Federal Reserve is adhering to.
It would be reasonable to assume that central bankers are heaving a sigh of relief after bringing their favored inflation index down from over 7% in June 2022, which was its highest level since the early 1980s, to its current reading of 2.7%.
On the other hand, it is quite unlikely that they will be doing anything other than that at their two-day meeting on monetary policy in June, which will begin on Tuesday. Officials are almost expected to maintain the current level of interest rates, regardless of the incoming Consumer Price Index data for the month of May, which is scheduled to be issued on Wednesday at 8:30 am Eastern Time (ET), only a few hours before the Federal Reserve makes its decision.
While speaking to reporters after the policy meeting that took place a month ago, Federal Reserve Chair Jerome Powell said, “Of course, we are not satisfied with 3% inflation.” He went on to say that “3% can’t be in a sentence with satisfied.”
On the subject of 2%, Powell and his colleagues at the Fed are not going to compromise. And until they are confident that inflation is on a path that will sustainably lead to that level, they will not consider lowering interest rates. This is in contrast to the policy of many central banks throughout the world, which has just lately began the process.
However, the Federal Reserve’s obstinacy may be attributed to more than one factor.
The impressions of the public are essential
Former Federal Reserve Chair Ben Bernanke has been quoted as saying that “monetary policy is 98% talk and 2% action.” That is quite a bold statement. To put it another way, the capacity of the Federal Reserve to achieve 2% inflation is mostly a consequence of the public’s conviction that it will be achieved.
In Europe, interest rates are in the process of decreasing. The Federal Reserve will not follow suit just yet.
If consumers anticipate a three percent increase in costs, it would be nearly irresponsible for firms to refrain from implementing price increases that are in line with what they are already expecting. It is conceivable that workers will want salary rises on pace with those price increases in order to finance them. Inflation will be considerably more difficult to bring down as a result of this for the Federal Reserve.
It is not only a hypothetical anticipation that inflation will be three percent. People anticipate that prices will increase by around three percent in the following year and in the years to come, according to a number of studies, including one conducted by the Federal Reserve of New York.
It is quite conceivable that the Federal Reserve officials will lose their capacity to convince those individuals that they are serious about their desire for 2% inflation if they allow themselves to get comfortable with those expectations. As a result, it is essential for those in charge of central banking to insist on 2%.
In a recent address, the President of the Federal Reserve Bank of New York, John Williams, said that “central banks earn credibility with the public by communicating an explicit inflation target and then delivering inflation consistent with that target.” “This helps to anchor expectations, which in turn contributes to low and stable inflation,” the author writes.
There is a downward trend in inflation that is occurring
If the most recent estimate of inflation indicated that it had decreased to 2.7% and there were evidence pointing to further improvement, that would be one thing. However, in the most recent few months, this has not been the case.
With the exception of March, when prices increased to 2.7% from 2.5% in February, the Personal Consumption Expenditures price index for April did not change from its previous level.
A further point to consider is that the annualized inflation rate for the country was 3.4% in the first quarter of this year, according to the inflation data available.
“Fortunately, that number is nowhere near the 7.1% headline inflation we saw in June 2022, but it does remind us that the job is not yet done,” Richmond Fed President Tom Barkin said in a speech he made last month. Barkin was referring to the fact that the job is not yet finished.
A measure of inflation known as “core” inflation, which occurs when highly volatile categories such as food and energy are removed from the equation, would not alleviate the worries of central bankers. On an annualized basis, that indicator has increased by 3.7% during the course of the first three months of the year. This is much higher than the average values for the second half of the previous year.
It is impossible for the Fed to ignore CPI
Despite the fact that the Consumer Price Index (CPI) is not the inflation measure that the Federal Reserve targets, central bankers do not disregard it.
This is due to the fact that it conveys the sentiment that inflation is putting a strain on the American people at levels that are not ideal. The fact that inflation as measured by the Consumer Price Index dropped to 3.4% in April from 3.5% in March was, nevertheless, very encouraging news for the executives of the Federal Reserve.
In spite of this, Federal Reserve Governor Christopher Waller said in a statement that was published a month ago that “the progress was so modest that it did not change my view that I will need to see more evidence of moderating inflation before supporting any easing of monetary policy.”
