Sharp Fed rate hikes loom amid signs of spike in inflation

The authorities of the Federal Reserve from USA appear poised to offer a series of aggressive interest rate hikes at least through the summer to deal with soaring inflation and rising labor costs, even though two reports on Friday showed tentative signs that both may be coming to a head. its peak.

High food and gasoline prices pushed headline inflation to 6.6% in March, a 40-year high, according to data from the Commerce Department.

At more than triple the Fed’s target, inflation is why the central bank is expected to pick up the pace of rate hikes with a half-point hike at each of its next three meetings, and continue to climb rates towards the end of the year.

Contracts linked to the Fed’s policy rate now show strong bets that the interest rate will rise to a range of 3%-3.25% by the end of the year, putting borrowing costs in territory where central bankers Americans believe it will slow growth.

But the measure of inflation most closely watched by the central bank as a signal of underlying price pressures, known as the core personal consumption expenditures price index, slowed slightly to 5.2% in March, from 5.3% the month previous.

The report, from the Commerce Department, also contained new evidence of a long-awaited shift toward spending on services that Fed officials hope will also ease upward pressure on prices, as spending on durable goods eased.

Meanwhile, a separate report showed employers increased benefits to attract workers, accelerating the pace of rising labor costs to 4.5% and underscoring the Fed’s view that the labor market is extremely and perhaps unhealthily tight. But private wage growth stabilized, at 5 percent.

The reports “won’t stop the Fed from raising (the rate by) 50 basis points next week, but it does support our view that inflation will ease a bit faster this year than Fed policymakers appear to expect,” Andrew said. Hunter, senior US economist at Capital Economics.

The Fed, and particularly its chief, Jerome Powell, are taking nothing for granted after failing several times over the last two years in their assessment of inflationary pressures that refused to abate as predicted.

“We want to see real progress on inflation,” Powell said just over a week ago, citing another round of possible sustained upward inflationary pressures caused by the war in Ukraine and the recent lockdowns due to the Covid-19 in China that prolong supply chain problems. “The real peak may have been in March, but we don’t know, so we’re not going to count on that.”

At its meeting next Wednesday, the Fed will raise interest rates by half a percentage point, above the usual 25 points, as it seeks to rein in overall demand that has far outstripped supply in both labor and goods. It is also ready to give the go-ahead to start the process of reducing its asset holdings as another way to tighten financial conditions.

Some analysts weren’t comfortable with any of Friday’s reports, noting that the continued rise in overall labor costs kept fears of a wage and price spiral in play.

“These readings, which show no signs of easing, will be a cause for concern for Fed policymakers as they make decisions on monetary policy in an environment where the labor market is tight and prices are at an all-time high.” in 40 years,” wrote Rubeela Farooqi of HFE.

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