Fed plans to keep interest rates high through the spring — no doubt about it

“What’s the rush,” said Fed Gov. Chris Waller, summarizing the message delivered by a parade of top central bankers over the past week.

That’s disappointing news to home buyers, car buyers and other big borrowers, but the Fed’s rationale is simple: The most recent readings on consumer and wholesale prices came in hotter than expected.

These reports cast doubt on whether inflation will slow as fast as Wall Street expected toward the Fed’s 2% goal.

Buckle up, Fed VIPs say, the path forward to 2% inflation is likely to be “bumpy.” Just listen to them.

“The disinflationary process has been, and may continue to be, bumpy and uneven,” said Fed. Gov. Lisa Cook.

“That disappointing CPI reading highlights that the disinflation process is likely to be bumpy,” echoed Fed Vice Chairman Philip Jefferson.

“We are bound to have bumps along the road to disinflation,” added Philadelphia Fed President Patrick Harker.

The latest “bump” is likely to be the upcoming PCE inflation report due next Thursday.

The PCE index, the Fed’s preferred inflation barometer, is also forecast to run on the hotter side. Economists polled by The Wall Street Journal predict a spicy 0.4% increase in the core PCE for January.

”My expectation is that the rate of inflation will continue to decline, but more slowly than the pace implied by where the markets signal monetary policy should be,” said Raphael Bostic, president of the Atlanta Fed.

The surprising strength of the economy is a big reason why Fed officials doubt inflation will subside as quickly in the next six months as it did last year. The rate of inflation based on the PCE index decelerated to a 2.6% yearly rate in December from a peak of 7.1% in mid-2022.

The economy, meanwhile, grew at a very rapid pace in the second half of 2023 despite higher interest rates. And it’s is on track to expand at an above-average speed in the first three months of the new year.

Strong economic growth increases demand for goods and services and can lead to higher costs.

The labor market also remains quite robust and has fueled vigorous consumer spending. Layoffs are near historic lows, the 3.7% unemployment rate is close to a 50-year bottom and the economy is still adding plenty of new jobs.

The strength of the labor market raises questions about whether high wage growth will slow toward levels more compatible with low inflation.

Although pay is not rising as fast as it was a few years, ago, it’s still running well above pre-pandemic levels. Average hourly pay increased 4.5% in the 12 months ended in January vs. a roughly 3% pace in 2019.

“I prefer to see robust growth of workers’ wages, but for wage growth to be sustainable, it must be consistent with 2% inflation,” said Fed. Gov Adriana Kugler.

The flip side of a resilient economy and muscular labor market, Fed officials say, is that it gives them the luxury to wait for more data on inflation before cutting interest rates.

“The overriding concern is to get everything right at the right time because the economy continues to hum along,” Harker noted.

The economy has been so strong, Waller, contended, there’s little reason to worry even if the Fed keeps interest rates higher for longer.

The Fed jacked up its benchmark short-term rate from near zero in early 2022 to a top end of 5.5% in 2023 to combat the worst inflation in 40 years.

“It should be as clear to you as it is to me that there are no indications of an imminent recession,” Waller said. “Delaying rate cuts by a few months should not have a substantial impact on the real economy in the near term.”

So when should investors expect the first rate cuts? Right now Wall Street is betting on June — and Fed officials haven’t ruled it out.

While they say it pays to be patient right now, central bankers also expect inflation to slow enough to warrant rate cuts “later in the year” — another phrase adopted by multiple Fed officials.

Also read: Goldman Sachs now sees first U.S. rate cut in June, just four in total for 2024

The Fed’s top brass meets on June 11-12. Mark it down on your calendar.