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Opinion | Signs of US economic slowdown complicate Federal Reserve’s inflation battle
- The US central bank is bent on taming inflation but with core price rises slowing, consumption dropping and jobless claims growing, it may find itself having to address recession concerns
- While longer-dated Treasuries may prove less volatile over the near to mid-term, the path of shorter-dated yields is less certain
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The US Federal Reserve, which last week raised its benchmark overnight lending rate further by 0.75 percentage point, has a new challenge: figuring out how to reconcile uncomfortably high inflation with incipient signs of a slowing economy.
Having misdiagnosed the malady of persistent – and accelerating – inflation last year, Fed officials are unlikely to take their eye off the ball until there is clear and convincing evidence that price rises are moderating.
With headline inflation above 9 per cent, we are not there yet. So despite having increased the rate by 2.25 percentage points this year, US monetary policy is unlikely to have reached peak hawkishness.
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The past year has amply shown that the Fed’s objectives of providing guidance and being data-dependent can be incompatible. In December last year, it estimated its policy interest rate would end 2022 at 0.875 per cent – this has since crested 2.50 per cent. Data won out.
If the rhetoric shift is any indication, Fed officials have learned their lesson and now place greater emphasis on data over maintaining a path preordained by guidance. In addition to keeping policy calibrated, the ascendancy of data should help the Fed repair its damaged credibility.
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That said, the Fed could move in an orderly fashion and avoid overreacting to any data point. The US economy is complex and there can be considerable noise in higher-frequency data.
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