Since the meeting, the outlook for inflation has become more worrisome. At a news conference February 1, after the meeting, chairman Jerome Powell stressed that inflation, while still too high, was gradually cooling. He also suggested that it was still possible the Fed could quell inflation without raising rates so high as to cause widespread layoffs and a deep recession.
“The disinflationary process has started,” Powell said then, referring to the steady slowdown in year-over-year inflation from a peak of 9.1 per cent in June to 6.5 per cent in December.
But since then, a succession of economic reports has pointed to a still-robust economy despite the Fed’s eight rate hikes over the past year. Hiring has accelerated, retail sales have rebounded and revised figures show that inflation pressures remain high and might require more Fed rate hikes than many had assumed.
Last week, a government report showed that consumer price inflation rose faster than expected from December to January, and the year-over-year figure barely slowed last month, to 6.4 per cent. With revisions to previous months factored in, inflation rose 4.6 per cent the previous three months, up from 4.3 per cent in December.
In the past three months, so-called core prices, which exclude volatile food and energy costs, have risen at a 4.6 per cent annual rate. That is below the year-over-year number and suggests that more declines are coming. But that figure is up from 4.3 per cent in December.
With the economy now looking stronger and inflation more persistent, economists expect the Fed to raise its key rate higher this year than previously projected. Many now expect the central rate to boost its benchmark short-term rate to a range of 5.25 per cent to 5.5 per cent.
That would be three-quarters of a point higher than its current level and a quarter-point higher than the Fed had projected in December. The prospect of higher borrowing rates for companies and individuals has roiled financial markets, with stock prices falling and bond yields rising sharply this month.