By Lindsay Dunsmuir
June 13 (Reuters) – U.S. Federal Reserve officials, beset by high inflation and a weakening growth outlook, will set out on Wednesday how they think their increasingly difficult goal of cool down the economy without sending it into a tailspin.
This plight will be on full display when Federal Reserve monetary policymakers, as they raise interest rates by a second straight half-point, release their latest projections for economic growth, unemployment and inflation through 2024 and beyond. More importantly, they will indicate the speed and scale of rate hikes that policymakers see as necessary to tame inflation, which is at a 40-year high.
What is certain is that their forecasts will bear little resemblance to those issued in March, which showed that inflation was falling without unemployment rising or monetary policy being particularly restrictive.
The meeting comes two weeks after Fed Chairman Jerome Powell and US President Joe Biden met amid growing anxiety in the White House that the active labor market is tightening. See yourself drowning in rising costs for everything from rent and groceries to gas and airline tickets.
Powell has previously said that the central bank, which in March raised interest rates for the first time in three years, will continue to raise them until the rise in prices subsides “clearly and convincingly.” Monetary policymakers have already signaled that they plan to match this week’s hike with another half-point hike at their next meeting in July, which would put borrowing costs between 1.75% and 2.0. %, right where three months ago they thought they would be by the end of the year.
The inflation reading released last Friday, which was higher than expected, has cast doubt on those expectations, and economists at Barclay’s (LON:) expect a three quarter point rise this week or in July.
“It’s going to be a tough meeting in terms of messaging,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “It’s not a rosy picture. They don’t have any easy options to take.”
NEW FORECASTS, NEW QUESTIONS
US consumer price growth accelerated to 1.0% in May as gasoline prices hit a record and utility costs rose further, while core prices rose 0. 6% after advancing by the same margin in April, the Labor Department reported on Friday, underscoring the need for the Federal Reserve to keep its foot on the brake. In the 12 months to May, headline inflation rose 8.6%.
Policymakers’ new set of projections will reflect a faster rate of hikes, slower growth, higher inflation and a higher unemployment rate. The key will be in the amount of each of them.
All money leaders agree that the Federal Reserve should bring its interest rate to a neutral level—the level that neither stimulates nor constrains economic growth—by the end of this year. That rate is considered roughly between 2.4% and 3%.
The midpoint by the end of 2022 could easily rise enough to signal at least another half-point hike in September, given Friday’s worse-than-expected inflation reading. The extent to which the Fed will have to raise interest rates across the board will also increase, with most economists seeing the cap as somewhere between 3% and 3.5%.
As for the unemployment rate over the next two years, the key is whether policymakers raise it just one or two points, or whether there is a significant increase in layoffs, which would go against their idea that inflation can be controlled without excess unemployment.
Fed Governor Christopher Waller recently said that if the Fed could bring inflation down close to its 2% target while keeping the unemployment rate, currently at 3.6%, from rising above 4.25 %, it would be a “masterful” performance.
“I don’t think it will change much, but if it does … it’s a sign that they are concerned about the possibility of a serious slowdown or recession,” said Roberto Perli, who was also an economist at the Fed and is now head of global policy. by Piper Sandler.
THE FED’S PAIN THRESHOLD
Some of the factors keeping inflation so high, notably the supply shocks beyond the Fed’s control due to the Russian invasion of Ukraine that have caused food and cash prices to jump, show no signs of slowing down. to remit Overall, the central bank still faces huge uncertainty about the prospects for that and other supply chain disruptions caused by the COVID-19 pandemic.
Monetary leaders aren’t getting much help yet on the demand side either, as healthy finances at US banks, businesses and households are a potential headwind to curbing inflation as rates rise in an economy that has been able so far to pay the price..
The longer the Fed struggles to stifle demand and the longer inflation persists, the more likely the pace of price increases will take hold and the Fed will have to step up its act.
New Fed Governors Philip Jefferson and Lisa Cook, taking their places on the 18-member decision-making body for the first time, are unlikely to back down from their colleagues’ resolve to cut inflation.
“While Cook and Jefferson are expected to be loose-minded additions to the Fed, that won’t matter much as long as inflation is running at 8%, and we doubt they will roll back the Fed’s tightening plans anytime soon,” said Andrew Hunter, US economist at Capital Economics.
If the committee’s consensus does not align with Powell’s view of what is needed, Powell has shown with his recent intersessional guidance that he is prepared to lead from the front to ensure that inflation is decisively affected.”
David Wilcox, a former Fed director of research, now director of US economic research at Bloomberg Economics and a fellow at the Peterson Institute for International Economics, expects Powell to keep a close eye on inflation during his Fed-style tenure. Paul Volcker, the imposing Fed chief who tamed prices in the 1980s.
“Powell fully intends to go down in history, if need be, as Paul Volcker version 2.0,” Wilcox said.
(Reporting by Lindsay Dunsmuir in Edinburgh, Scotland; editing by Dan Burns and Matthew Lewis; translation by Flora Gómez)