Inflation and growth could be in conflict, but it was seen reopening cuts in June
Anne Safir and Howard Schneider
(Reuters) – New data could point to the emergent tension between dual inflation and employment targets in the US Federal Reserve. This is because consumer spending slowed more than expected, while price pressures remained sticky.
Traders claimed that the Fed kept the Fed down a quarter-point cut in interest rates at its June and September meetings this year, but analysts said the situation appears to be more complicated and that they can present policymakers with difficult decisions in the coming weeks.
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said: “There’s a lot of concern right now with the Fed.”
STAGFLATION refers to a combination of slow growth and high inflation, forcing policymakers to choose more reduction rates with more margins to support economic growth and employment.
Policymakers began pointing out the possibility this week.
“The Fed may need to balance inflation risk with growth concerns,” Kansas City Fed President Jeffrey Schmid said in a comment this week that he felt uncertainty about the economic outlook was the opposite risk and concern over inflation that could begin to weigh growth. “There are risks that could make monetary policy decisions more and more difficult.”
Schmid, before data on Friday, shows that inflation measured by the Personal Consumption Expense Price Index slowed in January, down from 2.6% in December to 2.5%. The core PCE scale excluding volatile food and energy prices fell from 2.9% to 2.6%, the Department of Commerce’s Bureau of Economic Analysis showed.
There are improvements, but progress towards the Fed’s 2% target has slowed in recent months, but concerns have risen that price pressure could be re-established in the wake of the import taxes the Trump administration intends to impose.
Of particular note for the Fed is the recent rise in consumer expectations for inflation, and if it persists, central bankers are reluctant to ease monetary policy for fear of robbing inflation psychology.
The same report on Friday showed an unexpected decline in consumer spending in January after a significant increase in December as households stocked goods prior to Trump administration telegraph tariffs. The recent decline in consumer trust could indicate a slower growth first given the US economy’s dependence on household consumption.