Investors are eagerly waiting for the Fed to send a signal of “raising interest rates in May and bowing down” after this week’s interest rate meeting. But the latest economic data suggest the central bank may not be able to do so.
Investors are eagerly waiting for the Fed to send a signal of “raising interest rates in May and bowing down” after this week’s interest rate meeting. But recent economic data suggests the central bank may not be able to do so.
The U.S. Labor Department reported on Friday that the employment cost index rose 1.2 percent in the first quarter on a seasonally adjusted basis, more than the 1 percent expected by economists polled by The Wall Street Journal. increase. The index rose 4.8% year-on-year, not far off the 5.1% year-on-year rise in the fourth quarter of last year and well above the level that Fed policymakers see as consistent with their 2% inflation target.
Also on Friday, the Commerce Department said in its monthly report on personal payments that its measure of overall consumer prices was roughly flat in March from the previous month, but its measure of core prices (which excludes food and energy categories to better reflect Underlying Trend Inflation) rose 0.3% on a seasonally adjusted basis. The core price index rose by 4.6% year-on-year.
Both reports will have an impact on the Federal Reserve meeting, which is scheduled to end on Wednesday.
…
Investors are eagerly waiting for the Fed to send a signal of “raising interest rates in May and bowing down” after this week’s interest rate meeting. But recent economic data suggests the central bank may not be able to do so.
The U.S. Labor Department reported on Friday that the employment cost index rose 1.2 percent in the first quarter on a seasonally adjusted basis, more than the 1 percent expected by economists polled by The Wall Street Journal. increase. The index rose 4.8% year-on-year, not far off the 5.1% year-on-year rise in the fourth quarter of last year and well above the level that Fed policymakers see as consistent with their 2% inflation target.
Also on Friday, the Commerce Department said in its monthly report on personal payments that its measure of overall consumer prices was roughly flat in March from the previous month, but its measure of core prices (which excludes food and energy categories to better reflect Underlying Trend Inflation) rose 0.3% on a seasonally adjusted basis. The core price index rose by 4.6% year-on-year.
Both reports will have an impact on the Federal Reserve meeting, which is scheduled to end on Wednesday.
The Fed has long argued that the Labor Department’s quarterly employment cost index may be the single best indicator of upward pressure on wages. That’s because, unlike the average hourly earnings figure in the monthly employment report, the employment cost index adjusts for changes in the composition of the labor force. For example, an increase in the employment of lower-wage workers relative to higher-wage workers may dampen average hourly earnings, but would not have the same effect on this measure of employment costs.
There is one surprise in the aforementioned employment cost report: Excluding one-time incentives (such as bonuses), private sector wages increased by 1.5% quarter-on-quarter. The figure is not adjusted for seasonal fluctuations and thus likely overstates underlying upward pressure on wages, but it was the largest increase since a 1.6% gain in the first quarter of last year.
Meanwhile, the Commerce Department’s consumer price data is the Fed’s preferred measure of inflation. Among the data, the Fed will be particularly focused on the 5.5% year-over-year increase in service prices. The increase was partly driven by an 8.3 per cent increase in housing prices, which largely reflected increases in rents. Housing prices are used to calculate housing costs for homeowners and renters. Private rent indicators have slowed sharply, and the Commerce Department’s housing price indicator, which lags the price of new leases, may also start to soften. Even so, strong service sector prices will increase the Fed’s concern that wage growth will filter through to inflation.
Expectations that the Fed will raise its target range for overnight rates by another quarter of a percentage point have been almost taken for granted since the strong March jobs report in early April. However, investors have been expecting this to be the last rate hike and have acted accordingly, as the collapse of Silicon Valley Bank and Signature Bank, and the subsequent struggle of First Republic Bank, effectively amounted to further raise interest rates.
This is likely to be the case. But without stronger evidence that wage and inflation pressures are cooling, policymakers will want to keep the door open for further rate hikes.