US inflation will have to 'sufficiently cool' for Fed to cut rates twice this year: Expert

While inflation remains too high, signs are now all pointing in right direction again, says Martin Wurm, director at Moody's Analytics

12:15 - 14/06/2024 الجمعة
File photo
File photo

Inflation in the US is expected to "sufficiently cool down" in the next few months for the Federal Reserve to cut interest rates twice in the remaining part of this year, according to an expert.

The Fed kept its federal funds rate unchanged Wednesday between the 5.25% to 5.5% target range as widely expected, which is the highest in 23 years.

Chairman Jerome Powell later told a post-meeting press conference that macroeconomic data has not given Federal Open Market Committee (FOMC) members confidence so far this year to begin interest rate cuts.

Consumer inflation in the US annually rose 3.3% in May, coming in lower than market estimates of a 3.4% gain, after increasing 3.4% in April year-on-year, according to Labor Department figures released Wednesday before the conclusion of the Fed's two-day meeting.

On a monthly basis, the consumer price index (CPI) showed no gain and also managed to come below market expectations of a 0.1% increase, following a monthly gain of 0.3% in April.

"Today's consumer price index report showed another good inflation reading after last month's reports already had prices trend in the right direction," Martin Wurm, a director at Moody's Analytics, told Anadolu.

"Mostly thanks to falling energy prices, annual headline inflation fell from 3.4% in April to 3.3% in May, softer than expected. More importantly, core inflation also rose less than anticipated, at its smallest monthly pace since last summer," he added.

- 'Core CPI came in lower'

Core CPI, which excludes volatile food and energy prices, gained 0.2% in May from the previous month, also coming below market estimates of a 0.3% increase and slowing its pace from the 0.3% gain in April, according to the Labor Department figures.

Annually, core CPI climbed 3.4% in May, also below market expectations of a 3.5% increase, following a 3.6% year-on-year gain in April.

"Critically, the core drivers of remaining inflation, especially shelter and service components like car insurance, all came in lower. While inflation, thus, still remains too high, the arrows are now all pointing in the right direction again," Wurm said.

Prices for services, except energy services, showed a monthly gain of 0.2% in May, losing their pace from an increase of 0.4% in the month before. And prices for transportation services surprisingly fell 0.5% last month after rising 0.9% in April.

- Fed penciling in just 1 rate cut this year

The Fed, in addition, signaled that it expects just one interest rate cut in the remainder of this year, according to the FOMC's projection materials released Wednesday.

The central bank's previous projections made in March, on the other hand, indicated that two rate cuts could be possible during 2024.

Wurm, however, said the latest projections revealed some disagreements among the FOMC members.

"Today's projections displayed some disagreement, with four members out of the FOMC's 19 surveyed members expecting no cuts by the end of the year, and eight projecting two," he said.

"As Chairman Powell pointed out during the post-meeting press conference, the change in projections reflects the committee members' best guess where rates will head, not the Fed's ultimate path forward," he added.

- 'Rate cuts expected in September, December'

Powell also said Wednesday that the most recent inflation readings, referring to the CPI figures, have been more favorable than earlier in the year; however, he added that there has been modest progress so far toward the FOMC's inflation objective.

"We need to see more good (macroeconomic) data to bolster our confidence that inflation is moving sustainably toward 2%," he said, noting the FOMC sees the latest CPI report "as progress and building confidence."

Wurm explained that a single inflation report is unlikely to change the Fed's stance as "more data needs to display a sustained trend of cooling inflation before cuts come into play."

"However, we predict that the recent positive trends will continue over the next two months. By our estimates, inflation will sufficiently cool for the Fed to cut rates twice this year by 25 basis points each, in September and December," he added.

- Producer prices cooling down

On Thursday, the producer price index (PPI) report, which measures changes in the prices of goods and services from a producer's perspective, was released and showed even more progress on reducing inflation.

Producer inflation in the US annually rose 2.2% in May, coming in lower than market estimates of a 2.5% gain and slightly slowing down from a 2.3% year-on-year increase in April, according to the Labor Department figures.

On a monthly basis, PPI unexpectedly declined 0.2% and managed to come in below market estimates of a 0.1% increase and significantly decreasing from a monthly gain of 0.5% in April.

Although the relationship between CPI and PPI is not considered straightforward, the two indicators are related to one another in certain respects. In some cases, the changes in PPI are carried to CPI.

If that were the case, the monthly decline in May PPI could have a positive impact on CPI in the coming months.

#Fed Chair Jerome Powell
#Martin Wurm
#rate cuts
#US Federal Reserve
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