Stubborn US inflation reinforces need for Fed's cautious approach, IMF says

Government data underlines bumpy path ahead in US central bank's battle to tame inflation

Wednesday's CPI report offered a reprieve for Fed officials, with core inflation slowing from 3.8 per cent in March to 3.6 per cent in April. Reuters

Recent hotter-than-expected inflation data is strengthening the argument for the Federal Reserve to be cautious in determining when to dial back interest rates, a representative for the International Monetary Fund said on Thursday.

Markets have pared back their expectations on when – or if – the Fed will cut interest rates this year after progress in taming inflation stalled in the first quarter.

“This is a reminder, of course, that there are going to be bumps in the road,” IMF spokeswoman Julie Kozack told reporters.

“And this reinforces the need for the Fed to be cautious and to be independent in deciding policy in the coming months.”

Wednesday's Consumer Price Index (CPI) report offered a reprieve for Fed officials, as the Labour Department reported core inflation had slowed from 3.8 per cent in March to 3.6 per cent in April. Headline inflation, meanwhile, slowed from 3.5 per cent to 3.4 per cent.

Still, while this showed a resumption in inflation's downwards trend, it is not likely to give the Fed confidence to dial back on its restrictive policy.

Separate reports released on Thursday underscored the Fed's bumpy path. Jobless claims for the week ending May 11 fell by 10,000 in a sign of a cooling labour market.

Meanwhile, import prices jumped 0.9 per cent last month, the largest increase in more than two years.

“The surge in April import prices won't instil the Fed with greater confidence inflation is decelerating, but officials will assuredly put much more stock in yesterday's CPI report which was a small step in the right direction and keeps a rate cut in September, our baseline forecast, firmly on the table,” said Matthew Martin, chief US economist at Oxford Economics.

The IMF's recent World Economic Outlook projected three rate cuts this year, in line with the Fed's projections from March. However, that was released before Fed Chairman Jerome Powell indicated a delay in the US central bank's inflation fight.

A delay in cutting US rates would also signal a delay in other countries whose currencies are pegged to the dollar, such as the UAE, Saudi Arabia and other Gulf Co-operation Council countries.

It also complicates the economic outlook for emerging markets, although Mr Powell said these central banks are stronger and more credible than in previous decades.

A majority of traders expect the Fed to issue its first rate cut in September, according to CME Group data. The Fed's current target range is 5.25 per cent to 5.50 per cent.

The Fed next meets on June 11-12, when officials will also update their economic projections.