Why the April Inflation Report Reinforces the Fed’s Plans to Pause

The Wall Street Journal2023-05-11

Federal Reserve officials were already leaning toward taking a summer vacation from interest rate increases to see if they have done enough to slow the economy and inflation.Wednesday’s inflation ...

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Ahvi
2023-05-11
Ahvi
Cool

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Core inflation, which excludes volatile food and energy prices and is seen as a better predictor of future inflation, was 5.5% in April, down from its recent 6.6% peak in September.The Fed has hinted that at key turning points, however, the individual data releases aren’t as useful in determining what it will do at its next meeting.That was the case last November, when the Fed was ready to slow down its rapid pace of rate increases even if inflation data didn’t show clear improvement because officials were placing greater emphasis on the delayed impact of its earlier moves. Through early November, the Fed had raised rates by 0.75-percentage point at four consecutive meetings.The same appears to be true again now. Fed officials raised their benchmark federal-funds rate last week to a range between 5% and 5.25%, the highest level in 16 years, to slow down the economy and combat inflation. At a news conference after their meeting, Mr. Powell cited reasons they could pause rate increases at their next meeting.Fed officials raised their benchmark federal-funds rate last week to a range between 5% and 5.25%. PHOTO: WIN MCNAMEE/GETTY IMAGES“We feel like we’re getting closer or maybe even there,” he said.The Fed has hinted at greater caution in moving rates up because of the lagged impact of stresses in the banking system that resulted from the sudden failure of Silicon Valley Bank in mid-March, which contributed to the collapse of Signature Bank and First Republic Bank. Those strains are expected to tighten lending standards for a swath of the banking industry that serves many small and midsize businesses and real-estate owners.Put differently, the Fed thinks it has a reasonable understanding of how interest-rate increases slow down the economy, but it doesn’t have the same comfort in forecasting a potentially sharper, bank-lending-induced slowdown. “It does complicate” matters, Mr. Powell said. “Credit tightening is a different thing.”There were several other notable examples in how Mr. Powell hinted at the outlook last week:When discussing how Fed officials had stopped telegraphing future rate increases in their post meeting statement, Mr. Powell volunteered that this was “a meaningful change.”While some Fed officials have pointed to the so-called “separation principle” in which the Fed uses tighter monetary policy to combat inflation and emergency lending programs to address bank stress, Mr. Powell allowed that this approach “ultimately…has its limits.”Finally, Mr. Powell noted officials had raised rates by 5 percentage points, which he said gave them the luxury of waiting to see if they had done enough. “You’re going to want to see that a few months of data will persuade you that you’ve got this right,” he said. Then, Mr. Powell offered his view that “policy is tight.”Those hints might have been subtle, but they were reinforced Tuesday when New York Fed President John Williams spoke at the Economic Club of New York. Each time Mr. Williams was asked whether the Fed had decided to pause, he demurred—but then offered up reasons that the Fed could, in fact, consider a pause.While the Fed hadn’t decided on a pause, Mr. Williams allowed that “we’ve made incredible progress over the last year or so” in raising rates.Instead of pointing to the importance of fresh data in determining the Fed’s next moves, he stressed the harder-to-quantify and even-more-lagged effect of tighter lending conditions. “Clearly it’s going to have an impact,” he said.All of this adds up to a likely Fed summer vacation from raising rates at their June and possibly July meetings before deciding this September whether they have done enough to slow down the economy.By then, officials could have a better understanding about how much trouble the banks face and whether the fallout will do enough—or even too much—to achieve the controlled slowdown of the economy and labor market that the Fed has been seeking.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9970990232,"gmtCreate":1683782589226,"gmtModify":1683782593938,"author":{"id":"3574166160473753","authorId":"3574166160473753","name":"Ahvi","avatar":"https://static.tigerbbs.com/bd216b3fbf19641a7fe648254585ce79","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3574166160473753","authorIdStr":"3574166160473753"},"htmlText":"Cool","listText":"Cool","text":"Cool","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9970990232","repostId":1199599519,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":18,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1199599519"}