Fed Likely to Seek More Evidence Despite Cooler Inflation Data

(Bloomberg) -- Federal Reserve officials received reassurance this week that inflation remains on a downward — albeit bumpy — path, but policymakers are unlikely to waver from their message that they need more evidence. 

The Fed’s preferred measure of underlying inflation cooled last month, advancing at the slowest pace this year, government data showed Friday. And on the heels of a softer pace of economic growth in the first quarter than originally expected, consumers trimmed their spending in April.

The reports paint a picture of an economy that is moderating in line with what policymakers would like to see — stemming concerns of a re-acceleration in price growth — but officials are likely to exit their gathering in the coming weeks seeking more confirmation before lowering interest rates.

“There’s a resumption in progress, which is welcome news for the Fed on inflation,” said Julia Coronado, MacroPolicy Perspectives LLC founder and former Fed economist. 

“It’s only one month of data. They probably need a few more before they’re convinced that progress has resumed,” she said, making a July rate cut unlikely but a September move “reasonable” if the trend continues.  

As policymakers head into their next meeting on June 11 and 12, they are likely to debate whether current interest rates are doing enough to cool growth and bring inflation down to the central bank’s 2% target — or if their efforts may not be weighing on the economy as much as previously thought. 

New York Fed President John Williams made clear Thursday he sees “ample evidence” that monetary policy is restraining the economy, adding that he expects inflation to keep falling in the second half of the year. He said a rate increase is unlikely. 

But others aren’t as confident. Dallas Fed President Lorie Logan, speaking later Thursday, said high rates may not be slowing growth as much as officials thought and policymakers need to keep their options open when it comes to future moves.  

Policymakers overall have said they need to see more data for clarity on where inflation — and interest rates — are headed, suggesting borrowing costs will remain elevated for longer. 

While officials won’t offer any further public remarks on the economy ahead of the central bank’s next gathering, the Fed is widely expected to keep its benchmark interest rate at a two-decade high, where it’s been since July.

“They’ll not only hold rates where they are for this meeting, but I don’t think we’re going to get any hints of a rate cut coming imminently,” said Sarah House, senior economist at Wells Fargo & Co. “It’s going to be another meeting in which the Fed largely buys time to obtain more data and see how the outlook evolves as we head into the second half of the year.”

Most policymakers aren’t certain on the timing of the first rate cut, but economic projections submitted at the June gathering will provide insight into how many reductions they expect this year. Officials narrowly signaled three rate cuts when they submitted their most recent forecasts in March. 

Investors expect the Fed to make one rate cut by year end, according to pricing in futures contracts.

Fed officials are also having a broader discussion about whether the neutral rate, the level at which borrowing costs are neither slowing nor stimulating the economy, has risen since the pandemic. If the figure, which is also known as r-star, is higher now, then interest rates may not be as restrictive as previously thought. 

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