The US Federal Reserve received encouraging data on Friday indicating a decline in inflation, helping to dispel doubts about the effectiveness of current monetary policy following stronger-than-expected price increases earlier in the year.
However, despite monthly progress, achieving the Fed's 2% annualized inflation target is expected to require significant time. This complicates discussions around the timing of potential interest rate reductions.
According to CNBC, San Francisco Federal Reserve Bank President Mary Daly stated shortly after a Bureau of Economic Analysis report showed no increase in inflation from April to May, "We are seeing evidence that (policy) is sufficiently tight. It's really challenging to look anywhere and not see monetary policy working: we have growth slowing, spending slowing, the labor market slowing, inflation coming down."
However, Friday's data indicates that further progress is necessary. The Personal Consumption Expenditure Price Index rose 2.6% year-over-year, exceeding the Fed's target of 2%.
Since launching an aggressive campaign in March 2022 to address high inflation, the Fed has maintained interest rates in the range of 5.25% to 5.5% since July of that year.
The central bank has emphasized that rate cuts would only be considered if there is confidence that inflation is steadily approaching its 2% target.
Market players interpreted the latest data as potentially bolstering this confidence. Short-term interest rate futures on Friday suggested a roughly two-thirds likelihood of a rate cut by the Fed in September, with another cut anticipated in December.
Daly affirmed that inflation remains elevated, projecting annual inflation to stay above 2% until the end of 2025. Earlier, Fed Chair Lisa Cook anticipated a decline in inflation this year, followed by a more substantial decrease next year.
Several Fed policymakers have refrained from definitive statements on the timing of potential rate cuts, citing varying scenarios that could necessitate an earlier or later decision.
To date, the Fed has maintained rates unchanged for a longer duration compared to previous instances. President of the Federal Reserve Bank of Atlanta Raphael Bostic suggested that conditions might warrant a reduction in the federal funds rate in the fourth quarter of this year.
Michelle Bowman, a vocal advocate for tighter monetary policy within the Fed, expressed reservations about rate cuts this year. She noted that despite cuts in other parts of the world, the Fed will proceed according to its own timeline.
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