Slow growth combined with stubborn inflation create headaches for Fed officials

Slow growth and stubborn inflation in the US economy may not be a nightmare for the Fed, but it can at least be a source of restless sleep. First-quarter results released Thursday showed the U.S. economy grew at an annualized rate of 1.6%, the slowest level in nearly two years, and inflation nearly doubled from the previous quarter and hit the highest level in a year. Together, these two data points indicate an environment of at least mild stagnation that will make policymaking difficult in the coming weeks and months. “It was obviously unexpected,” Matthew Ryan, a global financial services firm, said of the GDP report, “I think it might have been over a long time ago.” But expectations, I would say, have defied conventional wisdom and risen at a very strong pace in recent months, you might think that once the Fed starts raising interest rates, it won’t be able to reach interest rates “Markets are looking for a continuation of the good data run from mid-2022, Economists estimate real GDP growth at 2.4% and inflation figures at around 3% What it gets is essentially what some on Wall Street call the worst of both worlds: weak growth and stubborn price pressures. As a result, stocks sold off quickly, Treasury yields rose, and futures traders had to once again reevaluate their expectations for the Federal Reserve’s interest rates. After expecting at least six rate cuts at the start of the year, the market is now down to one and not factoring in another underlying rate cut, according to CME Group’s widely followed FedWatch tracker, which projects the likelihood based on federal funds futures contracts. Ryan said that while there may be some arguments that the Fed might consider a slowing economy conducive to policy easing, officials may look more closely at data on the Personal Consumption Price Index, their preferred measure of inflation. In the first quarter, overall personal consumption expenditures (measuring all items) increased at an annualized rate of 3.4%, and core PCE growth, excluding food and energy costs, was 3.7%. The Fed will take a closer look at PCE data when the Commerce Department releases monthly data for March on Friday. “I don’t think the Fed will be too affected by a slightly weaker than expected GDP number, even a 1.6% annualized number is not an absolute disaster. That’s still a pretty solid growth number,” Ryan said. “The Fed is going to be more concerned about inflation.” In fact, some Wall Street commentators noted that the GDP numbers were not alarming. Steven Blitz, chief U.S. economist at TS Lombard, wrote that the weakness came mainly from inventories and federal spending, while “growth in these sectors is accelerating, improving confidence in the economy’s future.” “Mathematically, the private sector is not weak.” “In the face of all this, what is the Fed going to do? Now hold on as chances of a rate cut this year are fading,” he said. “But, ultimately, this is a real growth story and a good thing.” It may prefer to cut interest rates to prevent a slowdown in economic growth, and weaker inflation indicators will encourage it to do so in the future. “Concerns about weak growth will be a key factor given the rate cut, with the first-quarter GDP data suggesting weaker fiscal stimulus and reduced support from commodity spending,” wrote Citi economist Veronica Clarke. Before simplifying.”