Fed not ready to declare mission accomplished on inflation

Fed not ready to declare mission accomplished on inflation

Fed not ready to declare mission accomplished on inflation

A hardening in expectations for Fed rate rises contrasts with signs that other central banks are taking a lower gear on the road away from easy monetary policy.

The rise in consumer spending, which accounts for 70% of the economy, gives the economy some momentum at the end of an otherwise weak quarter and provides some support for forecasts that consumption will accelerate this quarter as tax cuts and a gradual pickup in wages filter into Americans' bank accounts and sentiment.

Outgoing New York Fed President William Dudley told CNBC on April 16 that the central bank might have to alter its strategy of gradual rate increases "if inflation were to go above 2 percent by an appreciable margin".

An inflation gauge tied to consumer spending advanced 1.9 percent in March compared to 12 months ago. Personal income increased 0.3 percent in the month, the same growth in the previous month. This measure had been consistently moving on up, moving on up since it bottomed at 1.3% in August past year.

Excluding the volatile food and energy components, the PCE price index soared 1.9 percent in the 12 months through March, the biggest increase since February 2017, after increasing 1.6 percent in February. Based on that measure, the economy slowed in the first quarter. Many analysts believe stronger consumer spending this quarter will lift overall growth back to rates above 3 percent.

Another U.S. inflation measure, the Labor Department's consumer-price index, fell a seasonally adjusted 0.1% in March from the prior month, cooling from February's 0.2% gain.

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After raising rates in March, Fed Chairman Jerome Powell and his colleagues are expected to hold policy steady at a two-day meeting starting Tuesday.

Bond investors are signaling that they expect a pickup in USA inflation, having bid up the yield on the 10-year Treasury note last week above 3 percent before the yield settled just below that by week's end.

One more time, this "by itself, would not justify a change in the projected path for the federal funds rate".

But there is already a debate inside the Fed about what to do once it has hit the 2 percent inflation target.

According to Reuters, "The PCE price index was unchanged on a monthly basis after advancing 0.2 percent in February". Most foresee either two or three additional increases in the Fed's benchmark rate by year's end, coming after an earlier hike in January.

Personal incomes rose 0.3 percent in March, while wages and salaries advanced 0.2 percent - the smallest gain since October.

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