A key inflation gauge that revealed consumer prices rose last month at their fastest pace in decades could lead the federal reserve to begin shaping the groundwork to begin curbing its massive monetary support to the economy.
The Labor Department announced Thursday that the Consumer Price Index jumped 5% from January to an estimate a year before, it was the fastest year-over-year jump since 2008. Excluding volatile food and energy data, core inflation rose from a year earlier to 3.8%, the highest since June 1992.
The data could have significant implications for the U.S. Central Bank, according to Gary Pzegeo, managing director of fixed income at CIBC Private Wealth Management.
May's CPI data could tip the scales towards an earlier tapering discussion, but should not cause alarm at the Fed, said Pzegeo. The release was above expectations, but underlying price trend confirms the known impact of base effects and bottlenecks that the Fed has categorized as 'transitory' for the past several months.
Although policymakers are publicly committed to hold interest rates low where they have sat since March 2020 until the economy reaches maximum employment and inflation moderately exceeds 2% for some time, at least five Fed officials have suggested that discussion could take place soon regarding increasing the dollar amount of $12 billion in monthly asset purchases, a policy designed to keep credit cheap.
It may be time to at least think about tapering, said Philadelphia Fed President Patrick Harker last week.
Minutes from Fed meeting, 27-28 April also suggested that officials are inching toward a discussion about weening its support for the economy. Although most policymakers agreed they need to see substantial further progress in their goals of inflation and full employment, a number of officials said that if the economy continued to make rapid progress toward the committee's goals, it might be appropriate at some point in the upcoming meetings to discuss a plan for adjusting the pace of asset purchases.
That was the clearest sign yet that Fed officials are beginning to think about dialing back support and tightening monetary policy. Chairman Jerome Powell has been repeatedly asked whether the Central Bank is talking about reducing its quantitative easing program?
No, it is not time now, Powell said during an April press conference in May. We've said we'll let the public know when it is time to have that conversation, and we've said we would do that well in advance of any actual decision to taper assets purchases, and we will do so.
These are also misleading signals from the latest economic data : although inflation is increasing, job growth has been anemic with employers hiring far less workers than expected in April and May.
The mixed nature of these key announcements may give the Fed some time before it has to consider removing the current extraordinary accommodation, but they will likely use either the statement or chairman's press conference to note next steps in the discussion of curtailing its asset purchase program, said Pzegeo.
From June 15 - 16, the Federal Reserve officials will hold a two-day policy meeting next week, where they are expected to shed light on the monetary policy and the state of the U.S. economy.