If the Federal Reserve still has reasons to cut rates in the near future, it’s getting harder to find.
Friday’s April jobs report provided the latest evidence that the central bank’s biggest concern is not the tight labor market but the increasingly difficult cost of living for ordinary Americans.
The 115,000 increase in non-farm payrolls last month isn’t exactly outrageous, but it’s another sign that the jobs picture is at least stable enough to ease deflationary pressure.
In comparison, there is little evidence to say the same about inflation, which may have pushed the Federal Open Market Committee’s rate-setting hawkish stance that officials are free to stay where they are for longer.
“The Fed will focus on containing inflationary risks now that the labor market is recovering,” said Lindsay Rosner, head of equities at Goldman Sachs Asset Management. “The FOMC may feel compelled to remove bias from its next post-meeting statement in June, which could indicate that the hawks are gaining the upper hand on the committee for now.”
In Fed terms, that means the swelling of cautious sentiments from many regional presidents may continue.
At last week’s FOMC meeting, three of those chairmen voted against the post-meeting statement. The group did not challenge the committee’s decision to hold rates steady but rather to “forward guidance” language that is widely interpreted as indicating that the next move could be reduced.
Dealing with inflation
“I’ve never been a big fan of trying to use words in jaw-dropping policy decisions,” Austan Goolsbee, president of the Chicago Fed, said Friday in a CNBC interview. In addition, he said he is concerned about the current inflationary conditions.
“We’ve been above the 2% target for five years. We stopped making progress last year, and now in the last three months, it’s going up instead of down,” added Goolsbee, who won’t vote on the committee this year but will in 2027. “We have to look at this carefully, because if everyone starts to think that inflation has been the same as it has been for years. It’s a little pickle as a central bank.”
Goolsbee went on to say that inflationary pressures are coming from more than fuel and taxes, and are increasingly reflected in the cost of services. The consumer price index for March showed an inflation rate of 3.3%, above the Fed’s 2% target.
A normal rate of inflation and a stable labor market would generally argue against a reduction.
The latest data trends could support the argument that the Fed can continue to hold rates where they are while keeping its options open, including raising rates.
“This makes it even more clear that the Fed [can have] all the patience in the world,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. “There’s nothing in the economy that calls for them to lower interest rates.”
The Warsh problem
Although the market situation can change quickly, traders have ruled out any possibility of a rate cut from April 2031, according to the prices of the futures of the supported funds. In fact, the level curve means a very strong opportunity for climbing in the coming years.
“It obviously makes the Fed’s decision easier,” said Dan North, chief economist for North America at Allianz, about the latest data. “This makes the decision much easier to make, and maybe next year, we’ll start leaning the other way.”
If so, however, it makes things difficult for incoming Chairman Kevin Warsh, whom President Donald Trump sent to the Fed on expectations of low rates.
The former Fed governor has opened up about his interest in low interest rates, saying the Fed can still control inflation while easing policy. Warsh advocated an approach that focused more on the central bank’s $6.7 trillion balance sheet rather than the overnight funds rate as the primary policy tool.
However, selling rate cuts with inflation north of 3% will be a difficult task, especially given the current committee’s structural tendencies.
“He’s got his hands full on this. He’s certainly been chosen by Trump because he’s probably leaning on low interest rates,” North said at Allianz. “Warsh comes in, saying, ‘Gosh, I think it would be great if we could have a family fight just once.’ Well, I don’t think this was the fight he expected.”
