The Federal Reserve is moving full steam ahead on the monetary policy tightening front. The central bank strategy is to cool the economy, hoping that “tighter” money will reduce demand for goods and services, and thus reduce inflation. Specifically the Fed is quickly raising the benchmark short-term interest rate while also selling bonds for cash.
U.S. retail sales grew at a solid pace in April, reflecting broad-based gains and suggesting demand for merchandise remains resilient despite rampant inflation.
April’s pricing data did little to assuage concerns about inflation. Both the Consumer and Producer Price Indexes came in above expectations, with respective 12-month advances of 8.3% and 11.0%. The metrics showed significant increases in food, energy, and rental apartment prices.
The Federal Reserve raised the benchmark short-term interest rate by one-half a percent (“50 basis points”) at this month’s Federal Open Market Committee (FOMC) meeting. It was the first half-percentage-point hike in 22 years, and another sign that the central bank is playing catch up in its attempt to combat inflation.
While the U.S. economy contracted by an annualized rate of 1.4% in the first quarter, some other economic indicators have been positive. The headline negative number was a stark contrast to the 6.9% increase in gross domestic product recorded in the fourth quarter and worse than the consensus expectation calling for growth of around 1.0%.
First-quarter earnings season did not get off to a rousing start. In fact, the major U.S. banks, including JPMorgan Chase and Goldman Sachs, reported sharp year-over-year declines in earnings. The primary culprits behind the setbacks were higher operating expenses and generally weaker asset management and investment banking activities.
There is little relief in sight on the inflation front. The Consumer and Producer Price Indexes for March jumped 8.5% and 11.2% year over year, respectively. Rising prices for food and energy commodities were primarily behind the surge in costs.
The nation’s economy added 431,000 non-farm payrolls in March, with a pickup in the more highly-compensated manufacturing and professional and business services jobs to go along with the continued sharp recovery in travel and leisure positions. For the first quarter, an estimated 1.685 million jobs were created, as COVID-19 concerns stateside eased.
The Federal Reserve is closely monitoring the inflation situation. We think next week’s respective data on consumer and producer prices may be a watershed moment for the central bank because if those readings continue to show very large gains, it may force the Fed to act more aggressively on the monetary policy front.
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