Federal Reserve may contemplate June rate cut amid sticky inflation

As the Federal Reserve grapples with competing economic risks and a divided group of policymakers, the possibility of a June rate cut remains on the table despite the persistence of inflationary pressures.

Federal Reserve Chair Jerome Powell reiterated that the central bank is not becoming more tolerant of higher inflation, even as recent projections raised the inflation outlook for the year. However, former Fed officials and analysts suggest that Powell faces a challenging task in balancing economic factors and public expectations.

Upcoming data could support a June rate reduction if inflation declines convincingly towards the Fed's 2 per cent target, resuming a trend observed last year when the central bank capped the federal funds rate at 5.25 -5.50 per cent and laid the groundwork for easing. Alternatively, a slowing economy and weakening job growth could also prompt a rate cut to support the labour market.

Despite the possibility of inflation persisting, the Fed could frame a June cut as a potential one-off adjustment rather than the start of a series of reductions. Former Fed Vice Chair Richard Clarida suggests that policymakers may justify rate cuts by aligning them with the decline in inflation observed since last year, with the option to cut further if inflation continues to fall.

However, if inflation remains entrenched above the 2 per cent target, central banks may pause their rate cut cycles, relying on their belief that restrictive policies can eventually bring inflation back to target levels.

Recent comments from Fed officials highlight divergent views within the central bank. While some, like Fed Governor Christopher Waller, advocate for maintaining tighter policies if inflation data remains unfavourable, others, like Chicago Fed President Austan Goolsbee, suggest that recent high inflation readings do not undermine the trend towards easing price pressures.

Powell's upcoming appearance at the San Francisco Fed will provide further insights, following the release of new inflation data for February. Despite recent elevated price data, Powell maintains that inflation is gradually moving towards the 2 per cent target amidst occasional bumps in the road.

Overall, upcoming inflation and economic data will play a crucial role in shaping policymakers' decisions. With projections showing a sharply divided group, the consensus view on rate cuts could easily shift based on incoming data and policymakers' interpretations.

Ultimately, faith in disinflation and the belief that the economy can grow without triggering higher prices appear to influence the Fed's outlook, suggesting the possibility of easier policy ahead despite inflationary pressures.

(With Reuters inputs)