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.

Federal Reserve (Fed) officials have already signaled that a May rate cut is unlikely, but the recent uptick in inflation is making a June rate cut less likely. While interest rates are elevated and inflationary pressures are still present, the economy and labor market continue to remain healthy. Economic resilience is providing the Fed patience. That said, the economy could weaken if they remain patient for too long.

Inflation indicators pointed to rising price pressures in the first quarter of the year. Headline CPI inflation increased at an annualized rate of 4.6% in the first three months of the year, pushing up the annual inflation rate to 3.5%. Shelter inflation is still rising at a robust rate of 5.7% year-over-year, though it’s decelerating, albeit at a slow pace. Shelter is 36% of the consumer price index. Excluding shelter, CPI inflation is 2.3% year-over-year, but it’s the highest in 11 months. Labor market indicators remain strong. The economy added an average of 276,000 jobs per month in the first three months of the year and the unemployment rate is 3.8% entering the second quarter. While jobs growth is robust, wage pressures are easing. Average hourly earnings increased 4.1% year-over-year in March, marking the slowest pace of annual wage growth since June 2021.

We still anticipate Fed rate cuts in 2024. Despite the recent uptick in inflation in the first quarter, the trend of easing wage growth, slowing market rents, and rising productivity are likely to keep a lid on inflationary pressures going forward. As we experienced in the first quarter, there will be bumps in the road on the path towards the Fed’s inflation target of 2.0%. We are maintaining the Fed-O-Meter in its current position.