Even if the Fed still has reasons to cut rates in the near future, they are becoming increasingly difficult to find.
The April jobs report released Friday was the latest evidence that the central bank’s bigger concern is not a weak labor market, but rather the cost of living, which is becoming increasingly difficult for ordinary Americans to afford.
Last month’s 115,000-job increase in nonfarm payrolls is no big deal, but it’s another sign that the employment situation has stabilized enough to at least ease pressure to cut interest rates.
By comparison, there is less evidence that the same can be said about inflation, and the Federal Open Market Committee, which probably sets interest rates, is more likely to lean toward a more hawkish stance, with officials comfortable staying with the status quo for long periods of time.
“Now that the labor market appears to be getting back on track, the Fed will shift its focus to containing upside risks to inflation,” said Lindsey Rosner, head of multisector fixed income at Goldman Sachs Asset Management. “The FOMC is likely to feel forced to remove the easing bias from its statement after its next meeting in June, which would signal that hawks have the upper hand on the committee for some time to come.”
In Fed parlance, this means that the growing cautious sentiment of several regional presidents could become even stronger.
At last week’s FOMC meeting, three of these presidents voted against the post-meeting statement. The group did not object to the committee’s decision to leave interest rates unchanged, but rather to the wording of its “forward guidance”, which was widely interpreted to suggest that the next policy step was likely to be a rate cut.
face inflation
“I’ve never really been a big fan of trying to use language in policy making,” Chicago Fed President Austan Goolsby said in an interview on CNBC on Friday. He also said he was concerned about current inflation trends.
“We’ve been above the Fed’s 2% target for the last five years,” Goldsby added. “Our progress stalled last year, but in the last three months it’s been up, not down.” He does not have a vote on the committee this year, but will have one in 2027. “We’ll just have to wait and see because if everyone starts assuming that inflation is going to go back to where it was a few years ago, we’re going to be in a bit of a pickle,” he said. ”
Mr. Goolsby also argued that inflationary pressures are increasingly showing up not just in gasoline and tariffs, but also in service costs. The consumer price index for March showed an inflation rate of 3.3%, well above the Federal Reserve’s target of 2%.
Traditional approaches to rising inflation and stabilizing the labor market would typically argue against cuts.
Recent data trends could lend credence to the argument that the Fed can continue to maintain current interest rates while keeping options open, including raising rates.
“This makes it increasingly clear that the Fed has all the patience in the world,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. “There’s nothing in the economy that warrants further interest rate cuts.”
Problem for Warsh
Market sentiment can change quickly, but the pricing of federal funds futures has traders effectively ruling out any rate cuts through April 2031. In fact, the interest rate curve suggests that rate hikes are much more likely in the coming years.
Dan North, senior economist for North America at Allianz, said the recent statistics “obviously make the Fed’s decision easier.” “This will make it easier to stick with the decision and maybe next year the bias will start to tilt in the opposite direction.”
But if that’s the case, the situation poses a problem for incoming Fed Chairman Kevin Warsh, whom President Donald Trump sent to the Fed with hopes of lowering interest rates.
Former Fed directors have made no secret of their preference for lower interest rates, arguing that the central bank can keep inflation in check while easing policy. Warsh is advocating an approach that focuses on the central bank’s $6.7 trillion balance sheet rather than the overnight interest rate, which is currently the main policy tool.
But arguing for a rate cut when inflation is above 3% will be a difficult task, especially given the tilt of the current committee structure.
“He’s really committed to this issue, and President Trump certainly chose him because he’s probably leaning toward lower interest rates,” Allianz’s North said. “Warsh came over and said, ‘Well, I think it’s okay to have family fights once in a while.'” Well, I don’t think this was the fight he was expecting. ”
