Why the Fed is postponing its rate cut

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No upside. The Fed has definitively changed course. The June meeting of the Monetary Policy Committee (FOMC) will once again focus on the “dots”, on the governors’ forecasts on the trend of the official cost of credit, and also on the value of long-term rates – a non-explicit objective – which could vary after months of stability.

Will inflation stop?

Inflation data pushed the Fed to keep rates at the terminal level. The PCE index, which the US central bank adopted as a reference, was at November levels in April (2.7% per year), after the sharp rise in March. The core index has virtually stopped, at unsatisfactory levels: 2.8% (2.754% rounded to three decimals instead of one), as in March (2.813%) and February (2.815%).

Slightly high expectations

Long-term inflation expectations have also further stabilized around a slightly higher level than the inflation target, raising fears that disinflation may stop above the target: a circumstance which, in the Fed’s logic, could signal the persistence of price pressures capable of pushing them upwards again.

Accommodating financial conditions

Financial conditions, measured along the entire transmission chain by the Chicago index, continue to move towards a level of greater, and not stable, monetary accommodation, confirmed – for what it is worth in the short term – by attempts to recover supply of M1 money.

Federal spending stably high

One of the pressure factors on prices remains the push of federal expenditure which, after having interrupted a trend of very slow growth in 2020 with Covid, has stably remained at a higher level, keeping demand high. Even by eliminating – using a trimmed mean – the extreme data, the historical series continues to show a discontinuity compared to the past.