Fed officials consider leaving rates higher for longer

Following higher than expected inflation and labor market readings in January and February on the tail wind of a booming U.S. economy, Federal Reserve officials are suggesting they may keep interest rates higher for longer.

“It is too soon to say whether the recent readings represent more than just a bump,” Fed Chair Jerome Powell said at an event Wednesday. “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent.”

The consumer price index (CPI) topped expectations for the second straight month in February, coming in at a 0.4-percent monthly increase to hit a 3.2-percent annual increase. Prices without the more unpredictable categories of food and energy increased 3.8 percent annually.

Nonfarm payrolls increased by 275,000 in February, which was another upside surprise, even as the unemployment rate ticked up to 3.9 percent.

“Recent readings on both job gains and inflation have come in higher than expected,” Powell said. “The economy added an average of 265,000 jobs per month in the three [months] through February, a faster pace than we have seen since last June. And the higher inflation data over January and February were above the low readings in the second half of last year.”

Atlanta Fed President Raphael Bostic delivered a similar sentiment Wednesday, suggesting the central bank would only make one rate cut this year in the fourth quarter.

“If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP [gross domestic product], unemployment and a slow decline of inflation through the course of the year, I think it would be appropriate for us to do start moving down at the end of this year — the fourth quarter,” he said on CNBC. “We’ll just have to see where the data come in.”

The Fed influences price levels mainly through the labor market, lessening demand for goods by increasing borrowing costs, which can lead to diminished wage growth, hiring freezes and layoffs.

While the labor market is still robust in absolute terms, it has weakened over the course of the Fed’s monetary tightening, with unemployment rising from 3.4 percent in January 2023 to 3.9 percent in February. The quits rate has also dropped to 2.2 percent from 3 percent in 2022, and the ratio of open jobs to unemployed people has slacked to 1.4 from 2 over roughly the same time period.

This is substantial progress from the Fed’s point of view.

“Labor market rebalancing is evident in data on quits, job openings, surveys of employers and workers, and the continued gradual decline in wage growth,” Powell said Wednesday.

Absent from Powell’s Wednesday remarks were the effects of profits on recent price growth, which surged to an all time high in the fourth quarter as production in the U.S. economy boomed, a phenomenon that is getting more scrutiny from policymakers.

A recent Federal Trade Commission (FTC) report called out margin expansion in the grocery sector and said it should be something that policy makers look into.

“In the first three-quarters of 2023, retailer profits rose even more, with revenue reaching 7 percent over total costs. This casts doubt on assertions that rising prices at the grocery store are simply moving in lockstep with retailers’ own rising costs,” FTC researchers wrote in March.

Market commentators have been paying attention to unusual profit dynamics in the wake of the pandemic and remarking on the interplay between supply chain concerns and margin expansion.

“Memories of supply disruption argue for higher inventory levels, but concerns about profit margins as consumers rebel against price hikes may push for inventory cost discipline,” UBS economist Paul Donovan wrote in a February commentary.