Inflation Forecast: Progress and Policy Considerations

Inflation progress has been modest, with a potential for a rate cut by year-end.

### Fed Chair's Outlook on Inflation and Interest Rates
* 📈 The promising disinflation of the second half of 2023 **unceremoniously halted** in the first quarter of 2024, with the Q1 2024 bump **threatening to become a hill to climb**.
* 🔍 While the lack of progress toward the inflation target was concerning, inflation did not reignite, and the latest inflation data have been quite promising that **progress on disinflation has resumed**.
* 💰 "The May reading of the PC price index is not due for another 11 days, so I want to make sure that the lower inflation we are seeing so far in the second quarter is not a **pothole**."
* 🎯 "I remain focused on seeing inflation return to a **clear path** and return to our path toward our target of **2% annually**."
* 📉 Inflation is significantly down from a year ago, and the progress in recent months has been **modest**.
* 🔒 "I believe that the current policy interest rate, which has been held steady for nearly 11 months, will continue to **serve us well for a bit longer**, holding us from restrictive territory to bring inflation back to the target and to **mitigate those upside risks**."
* 🔮 "If all the forecasted factors align, I think **one rate cut could be appropriate by year-end**, but any forecast remains just that - a forecast. My commitment is to **remain data-dependent to ensure inflation returns to target sustainably**."

With regard to inflation, as we all saw,
the promising disinflation of the second half of 2023 unceremoniously halted
through the first quarter of 2024. Now, I had expected bumps in the road,
but the Q1 2024 bump threatened to become a hill to climb.
Yet, while the lack of progress toward the inflation target was concerning,
inflation did not reignite. And while I remain very attentive to
inflation risks, the latest inflation data have been quite promising that
progress on disinflation has resumed. Last week, CPI inflation released for
May was very welcome and the kind of price data I want to see, and I think we
all want to see more of. But I would add the caveat that our
inflation target is the PC price index, not the CPI. The May reading of which is
not due for another 11 days. If the higher inflation in the first
quarter was a bump on the road, I want

to make sure that the lower inflation we
are seeing so far in the second quarter is not a pothole.
So I remain focused on seeing inflation return to a clear on a clear path and
return to our path toward our target of 2% annually.
Inflation is way down from where it was a year ago, or if the high inflation
readings between January and March factored in.
Progress in recent months has been modest.
So I believe that the current policy interest rate, which has been held
steady for nearly 11 months, will continue to serve us well for a bit
longer, holding us from restrictive territory to bring inflation back to the
target and to mitigate those upside risk.
So over the ensuing months, I continue to closely monitor the data, both hard
and soft on inflation, labor markets, and economic activity.
And I will be asking whether it is or is not the right time to decrease the
policy rate. We're not.
Time will be.

Exactly. I just don't know at this point. I have a forecast for inflation, employment, and economic activity slowing, but above-trend growth, a modest rise in the unemployment rate, and a long glide path to target for inflation. If all of that happens to be as forecasted, I think one rate cut would be could be appropriate by year-end, as well as a medal for myself for being the best economic forecaster ever. Because look, any forecast remains just that. It's a forecast. I think this is important to emphasize. It's a forecast. It is not a locked-down commitment. My commitment is to remain data-dependent because this is how we get through this uncertainty and make sure inflation returns to target sustainably. Indeed, I see two cuts or none for this year is quite possible if the data break one way or another.

Harker Says One Fed Rate Cut in 2024 Is Appropriate

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The Halting of Disinflation Progress in Early 2024

Inflation progress slowed in the first quarter of 2024, raising concerns, but did not reignite.

The latest CPI inflation data for May was promising, indicating a potential resumption of disinflation.

However, the focus remains on the PC price index as the measure of inflation target.

The Federal Reserve's Focus on Inflation and Interest Rates

The Federal Reserve is focused on bringing inflation back to the target of 2% annually and preventing it from dropping further.

They plan to keep the current policy interest rate steady for a bit longer to mitigate the risks and bring inflation back on track.

The Federal Reserve will continue to monitor data on inflation, labor markets, and economic activity to determine the right time to decrease the policy rate in the future.

Forecasting Economic Trends: A Data-Dependent Approach

Anticipating above-trend growth, a slight increase in unemployment, and a gradual path to target inflation, the speaker suggests the possibility of a single rate cut by year-end.

However, they emphasize the importance of remaining data-dependent, highlighting that the forecast is not a definite commitment.

The speaker also acknowledges the possibility of two rate cuts or none at all, depending on how the data unfolds.