Kavan Choksi Business Consultant Discusses a Few Trends and Data Used by Feds to Make Policy Decisions

In its March 19-20 policy meeting, the U.S. Federal Reserve held its benchmark overnight interest rate steady in the 5.25%-5.50% range. The officials continued to anticipate approving three quarter-percentage-point rate cuts by the end of 2024. Kavan Choksi Business Consultant says that before the policymakers can start to ease borrowing expenses, they would want to see more data confirming that inflation is returning to the Fed’s 2% target.

Kavan Choksi Business Consultant provides a brief overview of the trends and data that Fed officials keep an eye on

In the March of 2024, consumer spending went up more than expected. Upward revisions to previous data additionally defied expectations that stressed households would pull back and slow down the economy. As per the data for March, retail sales rose 0.7%, which is more than the double of the figure projected by many economists.  This jump is likely to add to the increasing sentiment among the officials of the U.S. Federal Reserve that there is no urgent need to cut interest rates in an economy that is not showing much signs of buckling under the pressure of current credit conditions.

The United States Consumer Price Index accelerated in March to a 3.5% annual rate versus 3.2% in February. This was somewhat of a blow to the Fed officials hoping for signs inflation would resume its decline after its progress stalled at the start of 2024. Excluding core the cost of food and energy, core prices went up at a 3.8% annual rate, the same as the month before. These numbers led investors to push back to September in regards to their expectations for an initial Fed rate cut, and they now see only two quarter-percentage-point cuts in 2024. The increasing cost of shelter and gasoline further contributed to the bulk of the CPI increase, ultimately defying the hopes of policymakers who thought housing inflation was on the verge of a steady decline.

The personal consumption expenditures (PCE) price index, which is used by the Fed to set its 2% inflation target, increased at a 2.5% annual rate in February of 2024, up from the 2.4% seen in January. Core inflation additionally stripped of volatile food and energy prices rose 2.8%, marking a bit of a decline from the upwardly revised 2.9% in January. Neither of these numbers is likely to elevate the confidence among Fed policymakers that inflation shall return steadily to the central bank's target.

As Kavan Choksi Business Consultant mentions, the firms in the United States added a larger-than-expected 303,000 jobs in February of 2024. The employment gains in the previous two months were revised up by 22,000. The unemployment rate fell to 3.8%, thereby marking the 26th straight month below 4%. This is the longest such a run has been experienced since the 1960s. Fed officials have therefore got more comfortable with the idea that continued strong job growth could still allow inflation to fall, particularly if the supply of labor keeps increasing and wage growth eases. In March, the workforce of the United States grew by 469,000, the most since last August, while the annual wage growth eased to 4.1%, the lowest rate of increase since June 2021. However, the rate is above the 3.0%-3.5% range that most policymakers tend to view as consistent with the Fed's inflation target.