More clarity on the possible trajectory of interest rates will perhaps emerge during the next Fed meeting, between April 30 and May 1.
In its March meeting, the US Federal Reserve had decided to hold rates steady. The minutes of that meeting released now show that policymakers had expressed concerns over the trajectory of inflation, noting that “recent data had not increased their confidence that inflation was moving sustainably down to 2 per cent”. The inflation data released by the US Labour Department on Wednesday seems to confirm those fears. CPI inflation rose to 3.5 per cent in March, up from 3.2 per cent in February, surpassing expectations. The increase was driven by fuel, housing, and clothing, among others. Core inflation, which excludes food and fuel, remained at 3.8 per cent. As RBI Governor Shaktikanta Das had noted in his comments on the global economy at the last monetary policy committee meeting, “Inflation is moving closer to targets, but the last mile of disinflation is turning out to be challenging.”
Until now, there were expectations that the Fed would cut interest rates three times this year, with the first cut likely to be in June. However, recent macroeconomic data seem to suggest that this may not be the case — the rate cuts may not come as soon or in the magnitude that many had previously expected. Data shows that non-farm payrolls rose by 3.03 lakh in March. Alongside, average hourly earnings were up by 4.1 per cent, and the jobless rate fell to 3.8 per cent. A stronger-than-expected economy, and continued uncertainty over the trajectory of inflation, with higher-than-expected readings, could possibly delay the much anticipated Fed pivot. Even though inflation has fallen from the high of 9.1 per cent in June 2022, the absence of clear and convincing evidence of it falling sustainably back to the target, only raises the odds of the Fed having to keep interest rates higher for longer. As per reports, the markets are now pricing in two rate cuts this year, beginning in September. Some are less optimistic. The minutes of the FOMC meeting did, however, reveal that “all participants” thought that it would be “appropriate” to shift to a “less restrictive stance” this year, if economic conditions were in line with expectations.
More clarity on the possible trajectory of interest rates will perhaps emerge during the next Fed meeting, between April 30 and May 1. But for central banks in countries around the world looking to the US Fed for policy clues, the situation has become more complicated.
© The Indian Express Pvt Ltd
First uploaded on: 12-04-2024 at 06:12 IST
