US Fed's policy outlook hinges on economic data

The Federal Reserve's upcoming policy decisions will be closely guided by a stream of crucial economic data, particularly focusing on inflation, employment, and retail sales trends. The central bank, which maintained its benchmark interest rate steady in the 5.25-5.50 per cent range at its recent meeting, has signalled a potential reduction in rates pending more confidence in inflation easing towards its 2 per cent target.

Here's a breakdown of the latest economic indicators and their potential impact on Fed policy:

Inflation

The Consumer Price Index (CPI) registered a higher-than-expected 3.2 per cent year-on-year increase in February, driven mainly by rising petrol and shelter costs. However, the core CPI, which excludes food and energy costs, only saw a marginal decline to 3.8 per cent, underlining persistent inflationary pressures. Meanwhile, the Personal Consumption Expenditures (PCE) price index, crucial for the Fed's inflation target, exhibited a slower year-on-year increase in January, suggesting a mixed picture for price pressures.

Employment

Despite robust job gains of 275,000 in February, accompanied by a rise in the unemployment rate to 3.9 per cent, concerns linger over wage growth moderation and its impact on inflation dynamics. The subdued growth in hourly wages, both monthly and annually, reflects ongoing uncertainties in the labour market, although overall job growth remains robust.

Job openings

The Fed closely monitors the Job Openings and Labor Turnover Survey (JOLTS) for insights into labour supply-demand dynamics. While the job openings-to-unemployed persons ratio remains elevated, other survey aspects like the quits rate have reverted to pre-pandemic levels, indicating some stabilisation in labour market imbalances.

Retail sales

Retail sales contracted more than expected in January, signalling a potential slowdown in consumer spending after a robust holiday season. The decline, primarily attributed to adverse weather conditions and weakened auto and gasoline sales, raises concerns about economic growth momentum for the current quarter.

(With Reuters inputs)