FX.co ★ Federal Reserve needs rock-solid evidence of easing inflation

The Federal Reserve is worried by the fact that inflation has stuck at elevated levels for longer than expected. Something is going wrong with the plan to push inflation down using prolonged aggressive monetary tightening. At the same time, the US central bank still keeps a rate cut on its agenda at some point this year. In other words, the Federal Reserve hopes for a rate cut until the year's end but this policy move is not finally decided yet.

Meanwhile, the FOMC maintains the official funds rate in a target range of 5.25-5.5% per annum, at the highest levels since early 2001.

The latest inflation reports showed hotter-than-expected annual CPIs in January and February. So, some Federal Reserve’s policymakers reckon it is not a coincidence but a bad omen that should not be neglected. Therefore, stubborn inflation requires the central bank not to rush to cut interest rates. Other arguments for keeping interest rates at highs are a healthy labor market and robust economic growth. These factors set the stage for buoyant consumption that, in turn, accounts for inflation acceleration. The Federal Reserve needs compelling evidence that inflation is firmly going down. Only on this condition, the central bank will move on to monetary easing.

The nearest policy meeting of the US central bank is scheduled for April 30 – May 1. In the meantime, Chairman Jerome Powell is keeping markets in suspense. At the end of 2023, market participants expected a few rate cuts throughout 2024, but at present, the likelihood of at least one rate cut is fading week by week.