The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
There was a lot of uncertainty heading into the March FOMC meeting because of stress in the banking system, but the Federal Reserve (Fed) stuck to their plan on addressing inflation by raising interest rates 0.25% to a target range of 4.75% to 5.0% in the March meeting. Moreover, the median year-end Fed Dot Plot rate projection remained at 5.1%, which was 0.75% higher than market expectations leading up to the FOMC meeting. The Fed’s view is that inflation is still running too hot, and the March rate increase was warranted. Fed Chair Powell stated that bank system stress will tighten credit conditions, leading to the Fed not having to raise rates as much as they would have otherwise.
The key economic data on the labor market and inflation is still at a level of concern for the Fed. The number of job openings per unemployed job seeker is at a very high level, with nearly two job openings per job seeker. The Fed is worried this could add to wage inflation pressures. The good news is that labor force participation is rising, and wage growth is stabilizing, albeit at a level above pre-pandemic trends. On the inflation front, consumer price growth is easing, but inflation remains elevated at 6.0% year-over-year. Moreover, inflationary prices are broad-based as measured by trimmed-mean CPI. On a positive note, the producer price index (PPI) eased to a 23-month low in February. PPI measures input costs for producers and the Fed looks at this figure as a leading indicator. It's still above pre-pandemic levels but cooling fast.
The Fed-O-Meter dial is moving to the left. Financial conditions are tightening, and the weight of persistent interest rate increases is already creating a few cracks in the economy. While inflation remains stubbornly high, the Fed is projecting only one more rate hike this year before cutting rates next year. They feel that restrictive monetary policy will bring inflation back to the long-term target of 2.0%. We will continue monitoring economic data to read the tea leaves on the path of the Fed going forward.
