As Federal Reserve officials last year started steering the world towards possible interest rate cuts in 2024, they took heart in data showing inflation over many months had collapsed to the U.S. central bank's 2% target, evidence their policies were curbing a still too-hot economy.
Those downward sloping lines have now reversed through the first quarter of 2024, with new consumer price index data for March showing headline inflation accelerated to a 3.5% annual rate from 3.2% in the prior month, and a separate "core" measure excluding food and energy prices stalled at 3.8%.
The numbers are likely to feed doubt at the Fed that rates can fall any time soon in an economy that continues to grow above trend, produce enough jobs to keep unemployment low, and that has pushed a core of at least four of the 12 Fed officials voting on monetary policy into a skeptical stance.
Investors reacted to the latest inflation data by shifting bets away from an anticipated rate cut in June towards one in September. They also now see the Fed reducing its benchmark overnight interest rate by only half a percentage point this year, down from rate-cut expectations that had been as high as a full percentage point.
"When you start to see month after month of inflation not falling, and tipping up if you look at the six-month changes, I think that has given the Fed pause ... There has been a change in sentiment," said Karen Dynan, a Harvard University economics professor and a non-resident senior fellow at the Peterson Institute for International Economics.
While Fed officials might sketch out arguments for continued inflation declines based on "special stories" about housing or other parts of the economy, "when you rely on a whole bunch of special stories breaking your way, it is not a comfortable place," said Dynan, who sees the central bank remaining largely on the sidelines this year, perhaps approving only a single quarter-percentage-point cut in rates.
That's well short of the three quarter-percentage-point cuts Fed officials projected at their March 19-20 policy meeting - and indeed the hurdle to agreement on an initial rate cut may already be increasing.
Members of the Fed's rate-setting committee, including two governors and two regional reserve bank presidents, have since the last meeting detailed serious concerns about the inflation path, a sizeable group in a consensus-minded organization that realizes the symbolic weight the start of policy easing will have in a presidential election year.
'NO RUSH'
Richmond Fed President Thomas Barkin told Reuters last week that another month of disappointing data after higher-than-expected readings in January and February could change things significantly. The minutes of the March meeting will also be released on Wednesday, possibly detailing emerging policy divisions.
"I don't think any one month should make that much of a difference," said Barkin, one of the five regional bank presidents with a vote this year on rates policy. But "if you get another month that looks like January or February, that takes you in a very different direction in terms of how forward-leaning you are."
The fact that half of the items in the CPI are still seeing price increases of greater than 3% is "hard to reconcile ... with the kind of progress you'd want to make" towards the 2% target.
The annualized six-month change in CPI excluding food and energy prices - considered a reliable guide to underlying inflation - has risen steadily from 3.08% last November to 3.94% in March.
That upturn - seen also in the measure the Fed uses for its inflation target - interrupted a benign run of readings through much of last year that prompted policymakers to start laying the groundwork to cut the policy rate from the current 5.25%-5.50% range, where it has been since last July.
"Something appears to be giving, and it's the pace of the economy," Fed Governor Christopher Waller said in a speech in November in which he said the central bank was potentially just a few months from being able to cut rates to account for falling inflation.
The economy, however, has continued to grow above trend since Waller's remarks, and what appeared to be ebbing job growth has turned higher. Neither are inflationary developments on their own, but neither do they show an economy necessarily in need of lower interest rates, and the countdown to rate cuts that Waller helped touch off is effectively on hold.
'ELEVATED' DATA-DEPENDENCE
Fed Governor Michelle Bowman, perhaps the most ardent inflation hawk, has gone even further, saying last week that rate hikes could not be ruled out, although they are not her base case.
Atlanta Fed President Raphael Bostic, meanwhile, said after the March policy meeting that he had cut his outlook from two rate cuts over the second half of 2024 to a single move late in the year. In an interview on Tuesday with Yahoo Finance, he said it is possible the Fed might not cut rates this year at all.
The views of those voting policymakers are consistent with a general tempering of officials' rate-cut expectations. Fed policymaker projections released in March did not change the median outlook for three rate cuts this year, but the full range of estimates and the "central tendency" - excluding the three highest and lowest projections - narrowed as the most dovish policymakers all raised their outlooks for the policy rate.
Even the more skeptical Fed officials say their baseline has remained that inflation will slow and rates will fall if it does.
Others are not so sure.
"The Fed is not done fighting inflation and rates will stay higher for longer," said Torsten Slok, chief economist for Apollo Global Management. "We are sticking to our view that the Fed will not cut rates in 2024."
