NEW ORLEANS (Reuters) – Brace yourselves, folks! The Federal Reserve officials are at it again, engaging in a heated debate over whether interest rates in the good ol’ U.S. of A. are high enough. And things might get even more intense after a recent survey revealed a shocking surge in consumers’ inflation expectations.
“I can’t help but worry about the possibility of inflation skyrocketing, you know? And let’s not forget the uncertainty surrounding whether our policies are actually doing the trick and bringing inflation back to our 2% target,” remarked Dallas Fed President Lorie Logan at a Louisiana Bankers Association conference in New Orleans.
But hold your horses! Logan clarified that it’s still way too early to even consider cutting rates. “We need some clarity, people! We need to figure out where we’re heading and be open to changing our minds,” she quipped. However, she conveniently avoided directly addressing whether she believes the Fed should raise its benchmark policy rate from the 5.25%-5.50% range that has been chilling since July.
Meanwhile, in an appearance on CNBC, Minneapolis Fed President Neel Kashkari took a more laid-back approach. He claimed to be in a “wait-and-see mode” when it comes to the future of central bank policy. According to Kashkari, the Fed can simply chill at current rates “as long as needed” to cool down inflation. But, he did mention that there is a “high” bar for deciding that higher rates are necessary.
Now, let’s not forget the chorus of Fed officials, led by the one and only Fed Chair Jerome Powell, who have repeatedly voiced their belief that further rate hikes are completely unnecessary. Ah, the sweet sound of consensus… or is it just wishful thinking? Only time will tell. In the meantime, let’s grab some popcorn and enjoy the show!
In a recent interview with Reuters, Atlanta Fed President Raphael Bostic shared his thoughts on inflation and monetary policy. He still believes that inflation will slow down under the current policy, allowing the central bank to start reducing its policy rate in 2024. However, he clarified that the reduction may only be by a quarter of a percentage point and not until the end of the year.
Meanwhile, the outlook on inflation has become uncertain after three months of stagnant improvement. To make matters worse, recent data showed an increase in inflation expectations. The University of Michigan’s survey of consumer sentiment revealed that year-ahead inflation expectations rose from 3.2% to 3.5% in May, the highest level since November. Even longer-term expectations inched higher as well.
Although a single month’s reversal may not be significant, if this trend continues, it could challenge the Fed’s belief that inflation expectations are “anchored.” Some argue that the current interest rates might not be enough to combat inflation effectively. Anchored expectations are crucial for the Fed’s credibility and their goal of bringing inflation back to 2%.
During a talk at the Economic Club of Minnesota, Chicago Fed President Austan Goolsbee expressed concern about the rising inflation expectations, stating that it “bodes awful” for further progress in controlling inflation. However, he didn’t seem too worried about the immediate consequences. Goolsbee considered the current policy to be relatively restrictive.
Interestingly, the University of Michigan data was released while Logan was giving her remarks, but she chose not to address it. Maybe she was too busy coming up with witty one-liners about the economy. Who knows?
In a recent survey, consumer sentiment took a nosedive, leaving economists scratching their heads over what it means for the future of consumer spending. It’s like trying to decipher a secret code written by a squirrel on a rollercoaster. On one hand, households are expecting higher inflation, which could mean they tighten their purse strings. On the other hand, the economy is still chugging along, defying all expectations. It’s like the Federal Reserve is walking a tightrope, trying to balance price stability and growth without falling flat on their faces. Jeffrey Roach, chief economist for LPL Financial, even mentioned the dreaded “stagflation,” where growth slows down and prices keep climbing. Yikes! It’s a delicate dance, my friends.
Speaking of inflation, the Fed’s favorite measure, the personal consumption expenditures price index, showed a 2.7% annual rise in March. Not exactly a victory lap for progress, huh? Kashkari, in an essay he wrote, pondered if maybe interest rates weren’t restrictive enough, considering the robustness of the U.S. economy. It’s like trying to explain why your cat is suddenly doing backflips while juggling tennis balls. It just doesn’t make sense! San Francisco Fed President Mary Daly, in a taped interview, suggested that the “neutral” interest rate might have gone up a tad. But fear not, she said, the Fed can keep the policy rate where it is for a bit longer. Phew! At least there’s a potential solution to this puzzle.
So, what’s the verdict? Are we in restrictive policy territory or not? Daly seems to think so, even if the neutral rate is higher. It’s like trying to hit a moving target with a water gun – you might need more time to bring inflation down, but at least you’re still on the right track. And there you have it, folks, the great balancing act of the Federal Reserve. Will they succeed? Only time will tell. But for now, let’s sit back and enjoy the show, because this rollercoaster ride is far from over.