With no-show inflation, what does the Fed do next?

Fed likely to underscore a message No rates hikes in 2019

Fed likely to underscore a message No rates hikes in 2019

In March, the Fed left its benchmark federal funds rate unchanged in a range of 2.25 percent to 2.5 percent, while pledging to be patient with future rate hikes.

The meeting came after the Department of Commerce reported last week that the USA economy expanded at an annual rate of 3.2 percent in the first quarter, mostly driven by strong exports and private inventory investment. Feroli said that the Fed would likely be "more upbeat on growth, though with a more cautious reading of recent inflation developments". And in fact, their bets indicate a roughly 64% likelihood that the Fed will cut rates before year's end.

But the Fed is unlikely to cut interest rates anytime soon, for fear that it looks like they're caving to political pressure, according to analysts. It was the best performance for a first quarter in four years, and it far surpassed initial forecasts that annual growth could be as weak as 1% at the start of the year.

1 factor in that dovish view is that the economy might not be as robust as the most recent statistics suggest.

But some economists pointed out that the headline growth number overstated the US economy's underlying strength, as personal consumption and business investment was actually weak in the first quarter. If this is so, this could diminish the pace of growth and hold down inflation.

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Diane Swonk, chief economist at Grant Thornton, said much of the blame for the financial market turmoil and economic slowdown a year ago "may be traced to the administration's own threats of a full-blown trade war with China". The broader personal consumption expenditures price index rose 0.2% in March from the previous month, and climbed 1.5% from a year earlier, also below forecasts. It also increase the price of a loan.

"They will express concerns about the low inflation numbers", Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles, predicts of Fed officials this week.

After raising rates four times past year - and a total of nine times since December 2015 - in order to get ahead of expected inflation, the rate-setting Federal Open Market Committee now must evaluate the crosscurrents in the economic data, at the same time as it is feeling political pressure from President Donald Trump to cut rates. Last week, Trump asserted that annual economic growth would have reached 5% last quarter, instead of 3.2%, had the Fed supplied rates as low as the ones that arose throughout the Obama government, once the economy was recovering from the devastating 2008 fiscal catastrophe.

The Fed has hiked rates nine times December 2015 and Chairman Jerome Powell, a Trump appointee, has repeatedly given the impression that there will be no further rate hikes. Herman Cain, one of them, has since withdrawn. As recently as December, Moore was publicly calling for Trump to try to fire Powell.

"This strain won't influence the Fed's conclusions, but it will undermine confidence in the Fed, which sets a risky precedent", Swonk said.

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