The case for a 'one and done' Fed rate hike grows as economy slows
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[April 15, 2023] By
Howard Schneider and Ann Saphir
WASHINGTON (Reuters) - Economic data has begun to fill in the portrait
of a U.S. economy that is losing momentum, with reports over the last
seven days showing job growth, inflation, factory output and consumer
spending all slowing down.
The combined impact hasn't caused Federal Reserve officials to call a
halt to further rate increases, with policymakers still seen likely next
month to raise the benchmark overnight interest rate by a quarter of a
percentage point to the 5.00%-5.25% range, which would be the highest
since the onset of the global financial crisis in 2007.
But it is beginning to intensify debate over whether the U.S. central
bank's next increase will be its last in an aggressive tightening cycle
that finally may have begun to show its teeth. Financial markets are
betting on this 'one and done' scenario.
"Let's just be mindful that we've raised a lot, it takes time for that
to work its way through the system," Chicago Fed President Austan
Goolsbee said in an interview with CNBC on Friday after new data showed
U.S. retail sales fell 1% in March, a far bigger drop than expected by
economists in a Reuters poll.
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"With this retail sales number we are maybe seeing a little bit of that
lag and if you had financial stress on top of that, let's not be too
aggressive," with rate increases, Goolsbee said, referring to the
possibility that the recent failure of two regional U.S. banks may add a
deeper credit crunch on top of the anticipated impact of higher Fed
policy rates.
The retail sales data provided at least a hint that a pandemic-era
spending boom may be nearing an end, though some economists argued that
the historically low unemployment rate and rising wages make a sharp
drop in consumption unlikely.
In separate comments, Fed Governor Christopher Waller said he'd seen
little evidence yet that the economy was under stress, little progress
on inflation, and no reason to call off further rate increases.
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"I would welcome signs of moderating demand, but until they appear and I
see inflation moving meaningfully and persistently down toward our 2%
target, I believe there is still work to do," Waller said, anchoring the
argument that high inflation remains the Fed's chief antagonist at this
point.
The current inflation rate is more than twice that target, and progress
on getting it to move in that direction has been slow. Indeed, the
release of the University of Michigan's bi-monthly sentiment
pulse-taking on Friday showed the headwinds the Fed faces on that front
and bolstered the argument against pausing the tightening cycle.
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The Federal Reserve building is pictured
in Washington, U.S., on March 19, 2019. REUTERS/Leah Millis
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The data showed households expected inflation to accelerate
significantly in the year ahead, reversing months of progress
towards them viewing inflation as a receding phenomenon. The
survey's one-year inflation expectation has jumped a full percentage
point in April to 4.6% from a late-March reading of 3.6% - the
largest monthly increase since May 2021 when inflation was just
beginning to take root.
But even Waller acknowledged the Fed will need to keep a close eye
on financial and economic data in coming weeks, particularly for
evidence of what he called any "abrupt" shift in lending standards
that may reflect banks cracking down on credit beyond what
policymakers feel is needed to slow inflation.
'CLOSER TO THE END'
Economic data beyond retail sales is showing some evidence of a
slowdown - enough even that Fed staff ahead of the central bank's
March 21-22 policy meeting projected a "mild recession" beginning
later this year.
New data over the past week showed manufacturing output fell in
March, the headline rate of price increases tumbled, import costs
declined, and the margins added by businesses to their final prices
fell fast - a dynamic some economists argue could deliver a major
blow to overall inflation rates.
The 236,000 jobs added by U.S. employers last month would have been
considered robust in the years before the pandemic, but it marked
the smallest gain since December 2020 and a move toward what's now
expected to be a steady drift down in monthly employment growth.
There won't be much more topline economic data before the Fed's May
2-3 meeting.
However, weekly statistics on bank borrowing and lending could
figure into the debate, as will a quarterly survey of bank lending
officers that Fed officials will be able to review at their meeting
before it is publicly released the following week.
In a Reuters interview on Thursday, Atlanta Fed President Raphael
Bostic said he was encouraged by recent inflation trends, and felt a
single further rate increase would let the Fed "hit the mark and
hold" at a level that will cause inflation to decline over time.
Absent large surprises in the banking, inflation or economic data,
"they are feeling like they are getting closer to the end" of the
rate hiking cycle, said Scott Anderson, the chief economist at Bank
of the West.
(Reporting by Howard Schneider; Editing by Paul Simao)
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