“In recent months, there has been a lack of further progress toward the 2% inflation objective”. This additional sentence in the latest statement by US rate-setting policymakers appears to confirm the market’s current view that the US Federal Reserve will not cut interest rates soon. Reassuringly though, Chair Powell said it’s unlikely that the next policy rate move will be a hike.
The Federal Open Market Committee (FOMC) statement, released on 1 May, observed that “inflation has eased over the past year, but remains elevated”. That is a fair description of what has happened since the start of 2024: progress in slowing inflation has been disappointing.
The latest example can be seen in the employment cost index (ECI): it rose by more than expected between the fourth quarter of 2023 and the first quarter of 2024.
Year-on-year, the increase in wages and salaries for private industry workers stabilised at 4.3%. In contrast with other indicators, wage increases are no longer moderating – there’s a pause in the slowdown. This raises concerns as the ECI is reckoned to be the most relevant measure of wage developments.
As the latest index was released on the eve of the FOMC meeting, it triggered some market nervousness. During his press conference, Fed Chair Jerome Powell said, “we are prepared to maintain the current target range for the federal funds rate as long as appropriate”.
As expected, he pushed back the first cut in the policy rate, but reassured markets, saying “I think it’s unlikely that the next policy move will be a hike”.
By maintaining the easing bias in monetary policy despite stickier inflation, the Fed can be said to have provided investors with the sort of ‘comfort’ they were hoping for.
