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Another better-than-expected inflation reading on Friday is likely to make the Fed more cautious about the pace of rate cuts this year.
The Labor Department said Friday that the producer price index, which measures the prices companies pay to make goods and services, rose 0.3% from December to January, more than expected.
The 0.9% rise in January compared to the same month last year was roughly in line with December’s 1% rise and was well above the 0.6% decline expected by economists. It was the hottest month since January 2023.
These increases in producer prices followed Tuesday’s release of the consumer price index, which showed that consumer prices also rose more than expected in January.
As a result, the market assumed the Fed’s first interest rate cut would be in May or June, causing stock prices to plummet. Friday started with stocks falling again.
Federal Reserve officials have been trying to signal for the past month and a half that the rate cuts will likely come later than some investors expected.
The latest warning came Thursday night from Atlanta Fed President Rafael Bostic, who said in a speech that a rate cut would likely have to wait until the third quarter of this year.
“We expect inflation to continue to fall, but at a slower pace than the market indicates where monetary policy should go,” Bostic said. “A strong labor market and macroeconomy now provide an opportunity to implement these policy decisions without oppressive urgency.”
read more: Impact of Fed interest rate decisions on bank accounts, CDs, loans, and credit cards
Investors had expected the Fed to be more aggressive since the beginning of the year, expecting the first rate cut to occur in March. Their hopes were dashed when Fed Chairman Jay Powell essentially took the policy off the table in a Jan. 31 press conference and Feb. 4 appearance on “60 Minutes.”
Other Fed officials, including Richmond Fed President Tom Barkin, Boston Fed President Susan Collins and Cleveland Fed President Loretta Mester, have also urged patience in a series of recent speeches. Collins and Mester predicted that job cuts would likely occur “later this year.”
“The January report on consumer product index inflation shows that the path back to 2% inflation will be difficult,” Fed Vice Chairman for Supervision Michael Barr said Wednesday, referring to the central bank’s 2% target. It reminded me of what could happen.”
A more dovish response came from Chicago Fed President Austan Goolsby, who said Wednesday that beating expectations for consumer prices does not mean the central bank cannot cut interest rates in 2024. This allayed market concerns.
“Let’s not get excited that the CPI for the month was higher than expected,” Goolsby said.
read more: Inflation update on daily expenses: prescription drugs down, pet care up significantly
The latest formal assessment by Fed officials, a report known as the Summary of Economic Projections (SEP), currently predicts three rate cuts this year, although it is not clear when they will begin. Officials plan to update their assessment at their next policy meeting in March.
Bostic, who has a vote on the committee that decides the direction of interest rates, said Thursday that inflationary pressures are more widespread than he would like. He looked at the Consumer Expenditure Price Index, the Fed’s preferred inflation measure, and noted that more than a third of the prices in that basket rose at an interest rate of 5% or more in December.
Bostic also believes that commodity inflation could pick up as many businesses still have inventory to fill, and product orders could increase once inventories are depleted. showed that.
“Victory is not certain in our hands and we are still not satisfied with the inexorable decline in inflation to our 2% target,” he said. “Even if January’s CPI report turns out to be an anomaly, it may remain true for some time.”
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