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Fed Officials Stick to Powell’s Higher-for-Longer Script as a Key Inflation Reading Looms

Fed Officials Stick to Powell’s Higher-for-Longer Script as a Key Inflation Reading Looms

Jay Powell’s colleagues spent the last week backing a stance the central bank chair hammered home at his last press conference: Interest rates will be staying higher for longer.

In a series of speeches and interviews, various Fed officials reinforced they will be taking a careful, measured approach to monetary policy as they digest hotter-than-expected inflation at the start of this year and evaluate whether that picture changes in the coming months.

New York Fed president John Williams said "policy is in a very good place [now].” Minneapolis Fed president Neel Kashkari added, "I think it’s much more likely we would just sit here for longer than we expect." Chicago Fed president Austan Goolsbee noted: "I think now we wait."

The comments came after the Fed decided on May 1 to keep its benchmark interest rate in a range of 5.25%-5.50%, a 23-year high.

The Fed’s interest-rate-setting committee said in its last policy statement that "in recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective."

The next chance for more clarity comes this week with the first inflation reading for the beginning of the second quarter on Wednesday via the Consumer Price Index (CPI).

CPI for April is expected to show improvement, dropping to 3.6% from 3.8% in March on a "core" basis, which strips out volatile food and energy prices.

"They might need several months of inflation showing it's coming back down before they'll signal that ... they have confidence to cut," said Esther George, the former president of the Kansas City Fed.

George said she thinks the Fed will need three months of encouraging data. If that happens, the first rate cut could come in September — even with the presidential election looming in November. Two rate cuts could still happen this year, she added, or no cuts at all.

If the inflation news improves soon, that will reignite talk about the timing of a first cut, said former St. Louis Fed president James Bullard.

He said he believes a first cut in December is possible, while also arguing that the Fed could justify a cut now as long as the central bank didn’t promise anything further.

'You have to live with this decision'

Both George and Bullard lived through another election year in 2016 when all eyes were on the Fed as it weighed whether to take action.

That year, the question was when the Fed would raise rates following years of loose monetary policy needed to stimulate an economy damaged by the 2008 financial crisis.

Federal Reserve Bank Chair Jerome Powell speaking at a May 1 press conference. (Chip Somodevilla/Getty Images)(Chip Somodevilla via Getty Images)

It waited all through 2016 for greater confidence needed to raise rates and didn’t do so until the last meeting of the year in December, after Donald Trump had been elected president.

The tightening cycle that began in 2016 was done on the assumption that inflation would come back up to the Fed 2% target, Bullard said, as opposed to waiting for absolute certainty.

“It was anticipatory,” he said, and it took until 2021 for inflation to really surge higher.

“I think we raised the policy rate quite a bit in an environment where inflation was actually below target, and I think it's maybe viewed as not the best policy in retrospect,” he added.

George, who sat on the Fed’s interest rate-setting committee at the time, said the central bank wanted to be really confident raising rates was the right thing to do.

Esther George, left, when she was president of the Kansas City Fed. She is with New York Fed President John Williams, center, and Fed Chair Jerome Powell in 2018. (REUTERS/Ann Saphir) (REUTERS / Reuters)

"I think both uncertainty and the need for confidence in both of those periods were kind of the watchword for the FOMC,” she said. "Remember for the US economy, the world's largest economy, the American public, you're not going to play fast and loose with risk."

The Fed, she said, did not use the election as motivation for any decisions.

"One thing I was always mindful of is that you have to live with this decision long after an election. You are trying to look at what is in the long-run interest for the committee's decision making. You can't time these things, oh we'd like to do it now to avoid the election."

Not all Fed officials are optimistic that rate cuts will still happen this year. Fed governor Michelle Bowman said Friday that she does not expect any cuts this year due to the direction of inflation.

Kashkari also didn't rule out a hike if inflation stalls near 3%.

Goolsbee, who had been dovish in his comments earlier this year, made it clear Friday that three months of hotter inflation at the start of the year changed his view that inflation was clearly on a path to 2%.

Strong consumer spending and job growth are causing him to question whether the economy is tipping toward overheating and whether that’s long lasting or a blip.

"There isn’t much evidence that inflation is stalling out at 3% in my view," Goolsbee said.

"We hit this bump and now, I think, now we wait."