Despite the drop in March inflation data, Fed policymakers are likely to keep interest rates on hold as prices are likely to pick up in the coming months as more tariffs are absorbed.
“This is the last clear data before tariffs trigger a rise in inflation,” RSM Chief Economist Joe Brusuelas told Yahoo Finance.
The latest data from the Bureau of Labor Statistics showed that the core consumer price index (CPI) rose 2.8% year-on-year in the January-June period, down from the 3.1% annual core price increase in the previous month, the slowest annual increase in four years.
President Trump congratulated the data on social media, saying “Inflation is down!!!”
But Fed watchers don’t expect the cooling trend to last given the aggressive new tariffs imposed by Trump in his first months in office. Some of those tariffs were suspended for 90 days, but others remain in place, including a hike to 125% on China.
Stephen Brown, deputy chief economist for North America at Capital Economics, predicted that the Fed “will keep rates on hold this year” and that “core prices are likely to rise sharply once tariffs start to take effect.”
Alan Zentner, chief economic strategist at Morgan Stanley Wealth Management, said that “today’s lower-than-expected inflation should be considered old news, and tariffs are expected to push inflation higher in the coming months.”
She added: “The Fed remains in a difficult position, with financial conditions strained by the trade war on the one hand and rising inflation weighing on the economy on the other.”
Kansas City Fed President Jeff Schmid reiterated the Fed’s cautious stance on Thursday, saying in his speech that he intends to “closely monitor the inflation outlook” citing concerns that further price increases could push inflation expectations higher.
Another Fed watcher, Tom Porcelli, chief U.S. economist at PGIM Fixed Income, believes that Thursday’s CPI data will not change the Fed’s calculations, calling it “a one-time event that could lead to further strength in inflation data this year.”
Asked by Yahoo Finance if the inflation data released in March provides an excuse for the Fed to cut rates, Bocelli said that if more such data comes out, that’s true, “but I don’t know what we should expect.”
“In fact, to be more explicit, I think we should expect the exact opposite. Inflation is already high.”
Other Fed officials this week have emphasized a patient approach. Richmond Fed President Tom Barkin told reporters Wednesday that he thinks rates are likely to remain on hold for the rest of the year.
He noted that it’s hard to achieve full employment without price stability, and one of the lessons of the inflation battles of the 1970s was not to ignore prices.
Minneapolis Fed President Neel Kashkari said Wednesday that the bar for rate cuts is now “higher” to keep inflation expectations stable in the face of tariffs — even as the economy weakens and unemployment rises.
“It seems to me that the barriers to moving the federal funds rate one way or another have increased because of tariffs,” Kashkari wrote in an article.
Another cautious voice this week came from San Francisco Fed President Mary Daly, who said Tuesday that the central bank may take its time before adjusting rates, waiting to see how changes in trade policy play out.
“We lowered rates by 100 basis points last year,” she said. “That puts policy in a good position to remain appropriately restrictive — keeping inflation down — but not so restrictive that the economy becomes fragile,” Daly said Tuesday during a discussion at Brigham Young University.
Even Fed Chairman Jerome Powell made clear on Friday that the Fed is in no rush to do anything about rates because of so much uncertainty, saying it is “too early to judge the appropriate path for monetary policy.”
The same uncertainty dominated the Fed’s last meeting in March. The minutes released Wednesday showed that policymakers favored a “cautious” approach as they worried about rising inflation and slowing growth, while also knowing that “difficult trade-offs may lie ahead.”
Kansas City Fed President Schmid said, “It looks like we have seen a clear increase in upside risks to inflation, while downside risks to the employment and growth outlook have also increased.”
He stressed that the Fed must balance the risk of inflation with the growing possibility of growth and employment problems when formulating policies.
Schmid stressed that while in theory, tariffs may only have a temporary impact on inflation, he is “reluctant to seek too much comfort from theory in this environment.”
Boston Fed President Susan Collins said on Thursday that she believes that a wide range of new tariffs will push up inflation while slowing economic growth.
She believes that “it seems appropriate to maintain the current monetary policy stance at present”, but also said that “it may still be appropriate to lower the federal funds rate later this year.”
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