Fed is at cruising altitude, but still awaiting clearance to land

George Brown

Investors have fastened their seatbelts in anticipation of an imminent descent in US rates. But sticky wage growth is likely to keep a cautious FOMC in a holding pattern until later in the year.

This time last year, Federal Reserve (Fed) Chair Jerome Powell held a video call from someone he thought was Ukrainian President Volodymyr Zelensky. It was instead a pair of Russian pranksters, who subsequently released a clip in which Mr Powell appeared to claim that the central bank didn’t know of a “painless way for inflation to come down.” While the Fed questioned the veracity of the clip, most economists agreed that either a recession or anaemic growth was needed to achieve price stability.

However, the ensuing 12 months has proved humbling for the profession. The economy proved remarkably resilient in the face of restrictive rates, with GDP growing by an estimated 2.5% and non-farm payrolls averaging 225k per month. But core CPI eased from 5.7% to 3.9% over the same period and inflation fell even more sharply after stripping out the sticky shelter category, which dominates 40% of the index. On this narrower core CPI measure, prices are now just 2.2% higher than a year ago.

Shelter inflation appears to be on a glide path back to trend as lower rents eventually feed through. And core goods prices are likely to remain stable or even decline, even accounting for the recent disruption in the Red Sea. What remains less certain, however, is whether core services less shelter (or ‘supercore’) will moderate. Given that this is the closest reflection of domestic price pressures, it will ultimately determine if and when the Fed cuts rates this year.

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