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Explainer-Parsing the Fed's path to pause rate hikes

Published Jun 02, 2023 09:49AM ET
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© Reuters. FILE PHOTO: Federal Reserve Chairman Jerome Powell departs after holding a news conference after the release of U.S. Fed policy decision on interest rates, in Washington, U.S., May 3, 2023. REUTERS/Kevin Lamarque/File Photo

By Howard Schneider

WASHINGTON (Reuters) - Federal Reserve officials may still be fighting an inflation war, but they've opened the door to the possibility the U.S. central bank's benchmark overnight interest rate won't rise from the current 5.00%-5.25% range at the upcoming June 13-14 policy meeting.

Here's a guide to the data informing the debate and the most recent comments from Fed officials:

JOBS: Current release on June 2

Jobs growth in May blew through expectations, with 339,000 positions added across a broad set of industries, and wage growth remaining at a robust 4.3% annual rate. April's data was strong as well. The data could weaken the case for pausing rate hikes given that employment gains, from the central bank's perspective, have been unsustainably strong and labor market "softness" seen as necessary to lower inflation.

JOB OPENINGS: Current release on May 31

The number of open jobs for each unemployed job seeker rose in April to 1.78, reversing several months of steady progress towards bringing worker demand and supply into better alignment. Fed Chair Jerome Powell and other policymakers have paid particular attention to the statistic, and they would like to see it back to pre-pandemic levels of around 1.2. Expectations for another rate increase rose following release of the latest Job Openings and Labor Turnover Survey.

RETAIL SALES: Current release on May 16

Retail sales rose 0.4% in April, below the 0.8% expected by economists in a Reuters poll, but so-called core sales showed a larger-than-expected 0.7% increase, indicating consumption remains strong. Fed officials at this point give a textbook economics explanation for inflation, blaming it on a mismatch between supply and demand. Regardless of which side of the equation is more to blame, monetary policy at least in the short run works to curb spending: The more it expands, the more Fed officials may feel interest rates need to move higher.

INFLATION: Current release on May 26, next release June 13

The Personal Consumption Expenditures Price Index increased in April to a 4.4% annual rate from 4.2% in March, with underlying "core" prices excluding food and energy increasing 4.7% versus 4.6% in the prior month. Since the Fed uses the PCE to set its 2% inflation target, that was a blow to hopes of a steady decline in the pace of price increases.

Officials will get a final dose of inflation data when May's Consumer Price Index is released on June 13 as their meeting convenes, too late for any public commentary to shape the outlook.

BANK DATA: Released every Thursday and Friday

To some degree the Fed wants credit to become more expensive and less available. That's how increases in its policy rate influence economic activity. But recent bank failures threatened both unwanted broader stress in the industry and a worse-than-anticipated credit crunch. Weekly data on bank lending to customers, and Fed lending to banks, shows loan growth is slowing and borrowing by banks remains elevated.


The Fed's internal communications rules set a "blackout" period around each policy meeting. U.S. central bank officials could speak publicly about their policy views through June 2.

Fed Chair Jerome Powell, May 19: "Our guidance is limited to identifying the factors we'll be monitoring as we assess the extent to which additional policy firming may be appropriate to return inflation to 2%."

Fed Governor Philip Jefferson, May 31: "Skipping a rate hike at a coming meeting would allow the (Federal Open Market) Committee to see more data before making decisions about the extent of additional policy firming."

Fed Governor Christopher Waller, May 24: "I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2% objective ... But whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks."

Fed Governor Michelle Bowman, May 12: "In my view, our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain."

Philadelphia Fed President Patrick Harker, June 1: "It's time to at least hit the stop button for one meeting and see how it goes."

Cleveland Fed President Loretta Mester, May 31: "I don't really see a compelling reason to pause," Mester said in a Financial Times interview.

Minneapolis Fed President Neel Kashkari, May 22: "I think right now, it's a close call either way, versus raising another time in June or skipping," Kashkari said, adding that "important to me is not signaling that we're done."

St. Louis Fed President James Bullard, May 22: Bullard said rates may need to rise by another half of a percentage point this year. "The risk with inflation is that it does not turn around and go back to a low level ... As long as the labor market is so good, it is a great time to get this problem behind us and not replay the 1970s."

San Francisco Fed President Mary Daly, May 22: Daly said it is too soon to say what the Fed will do at the June meeting. "We have to be extremely data-dependent."

Dallas Fed President Lorie Logan, May 18: "The data in coming weeks could yet show that it is appropriate to skip a meeting ... As of today, though, we aren't there yet."

Richmond Fed President Thomas Barkin, May 16: "You could tell yourself a story where inflation comes down relatively quickly ... with only a modest economic slowdown ... I'm not yet convinced."

Atlanta Fed President Raphael Bostic, May 16: Businesses "are telling me 'we think you're close to overdoing it' ... There's a long history of the Federal Reserve overshooting their policy and driving the economy into a more negative place. I would rather avoid that if we can."

New York Fed President John Williams, May 8: "We haven't said we are done raising rates ... If additional policy firming is appropriate, we'll do that."

Chicago Fed President Austan Goolsbee, May 5: "We know that credit conditions like the ones we are seeing now in the past have been correlated with recessions, credit crunches," Goolsbee said. "It's way too premature to know what to do with monetary policy."

Explainer-Parsing the Fed's path to pause rate hikes

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