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Federal Reserve Chair Jerome Powell’s goal of having “clear and convincing” evidence inflation is coming down — leading to a slowing of interest rate increases — seems far away with price pressures hitting a fresh 40-year peak, according to economists surveyed by Bloomberg News.
A majority of economists say Powell’s threshold for triggering a down-shift in the pace of policy tightening will be several monthly inflation reports of 0.2% or less for the personal consumption expenditures measure of inflation, excluding volatile food and energy prices. The Fed uses the overall PCE measure as its target for 2% annual inflation.
While the monthly release of the Fed’s preferred report lags by several weeks, May data released Friday hardened the case for a more determined Fed tightening: Consumer prices excluding food and energy rose by a larger-than-expected 0.6% last month and 6% from a year ago, while the headline consumer price index gauge hit a fresh 40-year high of 8.6%.
Powell told The Wall Street Journal in May the Federal Open Market Committee needs to see “clear and convincing evidence” that inflation pressures are coming down and could consider moving at a slower pace when that metric is obtained. The Fed plans to raise rates by half a point in June and again in July, Powell and other Fed officials have signaled.
The Fed is looking for quarterly inflation numbers “consistent with target even if year-over-year growth remains above,” David Sloan, a senior economist at Continuum Economics, said in a survey response.
The Fed is far from the goal right now. Monthly core PCE inflation has averaged 0.4% over the 12 months ending in April, and every report this year has exceeded the 0.2% mark that would be consistent with the central bank’s goal.
While a majority of economists see the monthly core numbers as a key, 10% see monthly overall PCE inflation easing to 0.2% for several months as the needed evidence, while more than a quarter of respondents say several monthly declines in annual numbers will be pivotal .
None of those measures seem close to meeting Powell’s goals. Interest-rate futures are pricing in half-point hikes for June and July — which the Fed chair has signaled — as well as September, with rates above 3% at year’s end.
In coming months, improvements in supply chains disrupted by Covid-19 and easing energy prices could eventually help the inflation outlook, “while a weaker US growth story will make it more challenging for businesses to maintain their profit margins and a squeeze here can also contribute to slowing inflation,” said James Knightley, chief international economist at ING Financial Markets.
The Fed has no appetite to change its average 2% inflation target in response to the recent surge in prices, the vast majority of economists in the survey said.