Inflation is not stable enough to lower interest rates

It is not the right time to cut interest rates.

At the start of 2024, futures traders were predicting at least six rate cuts this year, starting in March 2024. However, a string of higher-than-expected inflation data has changed those predictions. The first expected rate cut has not happened, with the earliest cut predicted for September 2024.

Christopher Waller - Governor of the US Federal Reserve (FED) branch in St. Louis as a permanent voting member of the Federal Open Market Committee has shown caution and is not ready to support a rate cut at this time.

“If the labor market does not weaken significantly (the economy remains stable) and can tolerate a certain level of inflation, we will see inflation data for several more months before we can comfortably ease the monetary policy stance,” Christopher Waller told the Peterson Institute for International Economics.

Headquarters of the US Federal Reserve (FED) in Washington, DC (Photo: Reuters)

Meanwhile, Cleveland Fed President Loretta Mester reiterated her view on the need to consider inflation data before making monetary policy decisions in her comments at the Atlanta Fed Conference on May 21.

“I need to see inflation data in the next few months, it seems to be coming down,” Mr. Mester said, adding that if inflation data is coming down, it could suggest that inflationary pressures are easing and that there is no longer a need to maintain a tight monetary policy. However, monetary policy decisions are not only dependent on inflation data but also on many other factors such as the labor market situation, economic growth prospects and financial conditions.

Christopher Waller pointed to a string of recent data, from flat retail sales to cooling in both the manufacturing and service sectors, to show that the Fed's higher interest rates have helped to dampen some of the demand that has contributed to the highest inflation rate in more than 40 years.

Despite the strong wage gains, internal data point to tightness in the US labor market as more people are leaving their jobs. The competitive labor market is keeping wages high, but this could undermine the Fed's 2% inflation target.

In addition, the US consumer price index in April showed that the inflation rate was 3.4% compared to the same period last year, down slightly from March. The monthly increase was 0.3%, slightly lower than economists' forecasts. This indicates that the rate of price increases is more stable than previously expected, although it is still high compared to the Fed's 2% inflation target.

Need to wait longer

The Labor Department report was hailed as “a welcome relief” by Christopher Waller, but he stressed that while the report was an improvement, it was not enough to change his view that more convincing evidence was needed to support any monetary easing.

Christopher Waller did not reveal his specific expectations for the timing or magnitude of rate cuts, saying instead that he would keep it a secret and wait for specific developments he would like to see in future inflation reports.

In a statement, Atlanta Fed President Raphael Bostic echoed Christopher Waller's sentiment, saying the US central bank needs to be careful when deciding to cut interest rates for the first time to ensure that it does not affect spending by businesses and families. At the same time, they also need to be especially careful about putting policymakers in a position where inflation could rise again quickly.

"It's in our interest to avoid any volatility... We need to make sure that when we decide to proceed, inflation will stabilize at 2%, " Raphael Bostic told reporters on the sidelines of the Atlanta Fed conference in Florida. He said he still believes inflation will decline gradually over the year, and that a rate cut in the fourth quarter of 2024 is appropriate.

Source: https://congthuong.vn/cac-quan-chuc-fed-canh-bao-lam-phat-chua-on-dinh-de-ha-lai-suat-321683.html