The US CPI in January exceeded expectations, which has diminished the market’s anticipation of a rate cut by the Federal Reserve. However, Chicago Federal Reserve Bank President Austan Goolsbee reassured the market and emphasized that there is no need for an excessive reaction. He also stated that there is no need to wait for the inflation rate to drop to 2% before starting the rate cut.
The US Bureau of Labor Statistics released the January Consumer Price Index (CPI) this Tuesday (13th). The data showed that the year-on-year CPI growth rate in January was 3.1%, exceeding the market’s expectation of 2.9%. This almost eliminated the possibility of a rate cut by the Federal Reserve in March, pushing the timing of the first rate cut to June or later.
However, Chicago Federal Reserve Bank President Austan Goolsbee reassured the market on the 14th. In his speech at the Council on Foreign Relations in New York, he stated that even if the inflation rate slightly exceeds expectations in the coming months, the Federal Reserve will still be on track to return to its 2% inflation target.
Goolsbee emphasized that the inflation trend should not be judged based on one month of data. The Federal Reserve’s 2% target is based on the Personal Consumption Expenditures (PCE) price index, not the CPI, and there may be “some significant differences” between these two indicators.
Goolsbee also mentioned that he does not support waiting for the inflation rate to drop to 2% before starting the rate cut. The Federal Reserve’s current policy stance is “quite limited,” and he emphasized the importance of productivity growth to the economy and the Federal Reserve’s decision-making process. He also stated that inflation expectations are still within a “controlled range,” which is evidence of the Federal Reserve’s credibility.
Former Fed economist Claudia Sahm, who founded Sahm Advisers, shares a similar view with Goolsbee. In an analysis published this week, Sahm pointed out that the higher-than-expected increase in the January CPI in the US was mainly due to rising housing costs. Although it is currently challenging to return to low inflation, the mistakes that the Federal Reserve must avoid this year will have a greater impact on other sectors of the economy and financial markets.
Sahm mentioned that the Federal Reserve is considering cutting rates against a backdrop of strong economic growth. Some people believe that the Federal Reserve should not cut rates under strong economic growth. However, there are currently real risks, such as pressure on the real estate market and stress in the credit market and banking sector due to rising interest rates.
Several Federal Reserve officials have previously stated that the worst possible outcome would be the Federal Reserve starting to cut rates but having to raise them again after inflation rebounds. However, Claudia Sahm finds this concern strange. She believes that now is not the time for the Federal Reserve to delay rate cuts but rather the time for the Federal Reserve to step aside.
While Austan Goolsbee’s reassurance calmed the market or contributed to it, all four major US stock indices rose on the 14th:
– The Dow Jones Industrial Average rose 151.52 points, or 0.4%, to close at 38,424.27.
– The Nasdaq Composite Index rose 203.55 points, or 1.3%, to close at 15,859.15.
– The S&P 500 Index rose 47.45 points, or 0.96%, to close at 5,000.62.
– The Philadelphia Semiconductor Index rose 97.23 points, or 2.18%, to close at 4,565.41.