"New Federal Reserve News Agency": Regardless of what Powell "says", ultimately inflation speaks for itself

At the just-concluded April FOMC meeting, the Federal Reserve stayed put as scheduled, keeping interest rates at a more than 20-year high. However, the post-meeting policy statement still leaned dovish, suggesting that the possibility of a rate cut in the future is greater than a rate hike.

An article by Nick Timiraos from the New York Times and The Wall Street Journal pointed out that currently, the market's perception of the Fed's inclination is no longer as important, with economic and inflation data being more crucial.

Two factions within the Federal Reserve

Within the Federal Reserve, some officials have been concerned about keeping interest rates at elevated levels for too long, especially as inflation and wage growth are slowing down, which could put pressure on the economy.

Maintaining interest rates at the current 20-year high for a longer period may bring more pressure to regional banks, commercial real estate investors, and other industries, which have been particularly vulnerable, especially before the rapid rate hikes of the past two years.

Another camp believes that due to the strong economy, there is almost no need for a rate cut this year. They are concerned that with the Fed setting the inflation target at 2%, the inflation rate may stay well above 2.5%. Before considering a rate cut, these officials hope to see more evidence of the economy slowing down.

The latest data provides more support for the latter group, increasing the possibility of officials waiting for more evidence of economic slowdown before cutting rates.

Inflation data is key

Nick Timiraos emphasized that a series of disappointing inflation and wage data released this year has reduced investors' focus on the Fed's policy outlook and increased attention on inflation data.

Neil Dutta, Head of Economic Research at Renaissance Macro Research, told the media:

Powell can say whatever he wants, but ultimately, inflation data will determine everything.

Former senior Fed advisor William English believes that if inflation continues to exceed expectations, the Fed may need to reverse its dovish tone to leave more room for rate hikes.

Powell also emphasized at Wednesday's press conference that current rates are still sufficiently restrictive. Powell cited several signs of rate-suppressing demand, including slowing job growth and declining quit rates, with inflation expected to eventually decrease, partly due to the lagging effect of falling rental prices not yet fully reflected in official data.

He believes that the Fed is unlikely to resume rate hikes, but still added that the specific action path depends on data:

As far as the peak rate is concerned, I think... the data must answer this question for us.

Some analysts point out that currently, rate-sensitive sectors of the U.S. economy such as real estate and manufacturing may have withstood the impact of the Fed's rate policy, leading to risks of labor market tightening accelerating economic growth and inflation rebounding.

If inflation stays around 3%, the Fed may face a series of more challenging discussions. Chief Economist at KPMG Diane Swonk stated that she expects some Fed officials to continue tightening policies in this scenario, although "this is not what Powell wants."