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The Fed is winning the battle against inflation. Why isn’t the interest rate lowered? – KION546

By Elisabeth Buchwald, CNN

New York (CNN) — Legendary baseball coach and player Frank Robinson once said, “Close only counts with horseshoes and hand grenades.” The Federal Reserve complies with that requirement.

After the favorite inflation measure fell from over 7% in June 2022 – the highest level since the early 1980s – to the current 2.7%, you would think that central bankers would breathe a sigh of relief.

And yet they are likely to do everything but that at their two-day monetary policy meeting in June, which starts on Tuesday. Officials will almost certainly leave rates unchanged regardless of the upcoming May consumer price index report due Wednesday at 8:30 a.m. ET, just hours before the Fed’s decision is announced.

“Of course we are not satisfied with 3% inflation,” Fed Chairman Jerome Powell told reporters after last month’s policy meeting, adding that “3% cannot be in the same sentence as satisfied.”

Powell and his colleagues at the Fed will not give in to the 2%. And until they are convinced that inflation is on a sustainable path to that level, rate cuts will not be on the table – unlike many central banks abroad that have recently begun this process.

However, there are good reasons for the Fed’s stubbornness.

Public perceptions are crucial

Former Fed Chairman Ben Bernanke has gone so far as to say that “monetary policy is 98% talk and 2% action.” That is, the Fed’s ability to achieve 2% inflation is largely a byproduct of the public’s belief that this will become a reality.

If people expect prices to rise by 3%, companies would almost be foolish not to make price increases that meet what they already expect. To afford these price increases, workers will likely demand equal pay increases. That makes it much more difficult for the Fed to further reduce inflation.

The expectation of 3% inflation is not merely hypothetical. Multiple surveys, including one from the New York Fed, show that people expect prices to rise by about 3% in the coming year and years to come.

If Fed officials become complacent with these expectations, they will likely lose their ability to convince them they mean business when they say they want 2% inflation. That’s why it’s crucial that central bankers push for 2%.

“By communicating an explicit inflation target – and then ensuring inflation consistent with that target – central banks gain credibility with the public,” New York Fed President John Williams said in a recent speech. “That helps anchor expectations, which in turn contributes to low and stable inflation.”

Inflation is moving in the wrong direction

It would be one thing if the latest inflation figures showed it falling to 2.7% and there were signs of more progress. But that has not been the case in recent months.

April’s personal consumption expenditure price index was unchanged from March, when prices accelerated to 2.7% from 2.5% in February.

Moreover, inflation figures from the first quarter of this year put the country’s annual inflation rate at 3.4%.

“That figure is thankfully nowhere near the 7.1% headline inflation we saw in June 2022, but it is a reminder that the job is not done yet,” said Tom Barkin, president of the Richmond Fed , in a speech he gave last month.

Removing highly volatile categories like food and energy – a measure called “core inflation” – will not ease central bankers’ concerns. That index rose by 3.7% on an annual basis in the first three months of the year. That is well above the average of the second half of last year.

The Fed cannot ignore the CPI

Although the CPI is not the inflation gauge the Fed aims for, central bankers are not writing it off.

That’s because it tells an underlying story that inflation is pinching Americans at an unwanted level. For Fed officials, however, it was welcome news that consumer price index inflation fell to 3.4% in April from 3.5% in March.

Still, Fed Governor Christopher Waller said last month that “the progress was so modest that it did not change my view that I need to see more evidence of moderating inflation before I can support any monetary policy easing.”

The CNN Wire
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