Fed May Pause Rate Cuts after Unexpected Inflation Spike: The Economic Consequences of Inflation Rebound

The PCE index, a key indicator for the US central bank, reported that inflation in the United States rebounded in March. This unexpected increase should prompt the central bank to proceed cautiously before considering any rate cuts. Analysts had forecasted a more modest figure of 2.6%, but the data showed an acceleration in inflation to 2.7% year-on-year in March, up from 2.5% in February.

Despite the rise in annual inflation, monthly inflation remained stable at 0.3%. Core inflation, which excludes volatile prices of food and energy, also stayed steady, with a 0.3% increase on a quarterly basis and a 2.8% increase on a trend basis. Household incomes recorded stronger growth in March compared to February, while spending remained unchanged.

The Federal Reserve aims to bring down the PCE inflation index to 2%, and the recent rebound in inflation may lead the Fed to maintain current interest rates at 5.25-5.50% for a longer period. This cautious approach is aimed at preventing further price increases.

Fed Chair Jerome Powell noted that it may take longer than expected for inflation to return to the 2% target.

The job market remains strong in the US, with a low unemployment rate of 3.8% in March. The Fed’s efforts to reduce inflation have been successful, as economic growth slowed in the first quarter of the year.

Analysts now expect the Fed to delay any rate cuts until September or November as they closely monitor indications of the bank’s intentions this week.

The recent slowdown in economic growth could influence the Fed’s decision on when to adjust interest rates. Acting too late could potentially harm both economy and employment levels making it essential for Fed to carefully consider its next steps