US macroeconomic data backs up Fed’s ‘patient’ approach

Lower core inflation is expected to only be temporary, Powell says
federal-reserve
The Federal Reserve

A mixed bag of US macroeconomic data has persuaded the Federal Reserve to remain patient about making changes to its policy rate.

“Economic growth and job creation have both been a bit stronger than we anticipated, while inflation has been somewhat weaker,” said Fed chair Jerome Powell in a press conference after the May 1 monetary policy meeting.

Job gains rebounded in April, averaging 180,000 per month for the first quarter this year. This is “well above” the pace needed to absorb new entrants, Powell said. Unemployment has dropped to a more than 49-year low of 3.6%.

GDP rose more than most forecasters had expected; growth in private consumption and business fixed investment slowed,” Powell said.

While US headline inflation rose to 1.5% in March, up from 1.3% in February, core inflation fell from 1.7% to 1.6%. Powell pointed out that inflation ran close to 2% for most of 2018, emphasising it is not “persistently” running below target at this stage.

“The weak first quarter core [inflation] was not expected, and I don’t think is related to anything we did in terms of raising rates,” Powell said. “We do see good reasons to think that some or all of the unexpected decrease will wind up being transient.”

He cites portfolio management service prices, apparel prices and air fares as factors contributing to the temporary fall in inflation. He also points out that “trimmed mean” inflation did not go down as much.

Trimmed mean inflation was at 1.96% in March, up from 1.88% in January.

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