The sluggish rate of inflation continues to overshadow the firmer US growth, leading to a debate in the US Federal Reserve about whether the next interest rate move may need to move down and not up.
The US Federal Reserve, led by its chairman Jay Powell, is likely to hold politics at 2.25 to 2.5 percent if it meets on Tuesday and Wednesday. With US activity improving after a shaky start to the year and easing overseas risks, many analysts are confident that the Fed will keep interest rates at their current levels for the remainder of the year.
But political leaders, including Charles Evans of the Chicago Fed, have also opened the door to future discussions about whether the central bank wants to cut interest rates if inflation continues to decline or if growth takes an unexpected turn. Richard Clarida, vice chairman of the Fed, said in a CNBC interview this month that the central bank had made some "insurance cuts" in 1
Bill English, Yale University Professor The former Fed Department of Monetary Policy Director said he saw no compelling reason to cut interest rates at this time. "I suspect they will stay with you for a while and let the data speak," he said.
However, he added that if the Fed came to the conclusion in the summer and fall that inflation was lower than it wanted and the economy slowed down, they might want to push through one or two "easing measures" to see if that has improved outlook.
The United States posted strong growth on Friday. The economy expanded at an annualized pace of 3.2 percent. This indicates signs of a growth crisis earlier this year. The headline was well above the trend of the US economy, and is coming to healthy growth in US jobs and improving prospects in overseas economies, including China.
Some Economists Find It Difficult to Understand Why the Fed Should Give Up Plans In order to keep interest rates this year and to monitor in-depth economic data, there is evidence that inflation is finally gaining ground. At its last meeting, the Fed has done nothing to ward off the possibility of interest rate cuts. The minutes of the meeting underlined "significant uncertainties" regarding the outlook and added that policymakers' interest rate expectations could move in both directions.
But the picture is complicated by a number of factors. First, US economic headline growth numbers overestimated the underlying strength of the economy, according to Bob Schwartz, senior economist at Oxford Economics. An important measure of underlying private demand rose in the Bureau of Economic Analysis report on Friday by only 1.3 percent, compared with 2.6 percent in the fourth quarter.
And the weak inflation data included in the report only contributed to price increases in the US even as wages grew and unemployment fell to just 3.8 percent. The consumer price index rose an annualized 1.3 percent in the first quarter, while Friday's figures were weaker than Wall Street's expectations of 1.4 percent.
Continued weakness in inflation worries the Fed, in the face of the central bank Since the Great Recession, it has failed to keep price growth at a sustainable 2 percent. Bond investors, Mr. Schwartz said, "look at the glass as half empty. They see the continued low inflation in the report as a sign that the economy may be weaker than expected. "
The Fed's most recent protocols indicated that policy makers are heavily divided on the next step. A number of officials insisted on further interest rate increases for later this year. For some, the reduction rates may raise concern about the risk of dangerous bubbles in the markets. But other politicians are worried that inflation expectations are stubbornly weak.
Speaking on April 15, Evans said accelerating inflation from 2.25 to 2.5 percent was not a big problem given the subdued inflationary pressures. "If activity decreases more than expected or if inflation and inflation expectations are too low, policies may need to be shelved or even relaxed to create the right conditions to achieve our goals," he said.
The president of the Chicago Fed has rated 1.5 percent core inflation as particularly worrying, declaring that the inflation rate is justification for the policy's decision too restrictive.
Mr. Clarida had said a few days earlier that he saw no recession on the horizon, but historically that had not required the Fed to spot a threat of collapse before lowering interest rates. "When you look at the history of the Fed, there were times when the Fed made some insurance cuts in the 1990s. We saw that in '95. We saw this in 1998. Interest rate cuts are not always linked to a recession.
US President Donald Trump's public demands for interest rate cuts make the Fed's considerations even more cumbersome. The central bank does not want to be pushed into loosening policy by Mr. Trump, because she is eager to keep her independence. The US Federal Reserve does not want to panic the markets by being excessively forgiving.
"Fed officials are probably worried about the risk that a rate cut could appear political or could irritate markets," said Goldman Sachs analysts recently led by Jan Hatzius.