Federal Reserve Chair Jerome Powell, at his final press conference as the central bank chief, declared that the US economy is “quite resilient.” Growth is “solid,” consumer spending is doing “pretty well,” and most of the recent numbers are “good.” Despite the nine-week-old war in Iran that has delivered a second oil price shock in four years, the world’s top economy is weathering the storm, and the latest tranche of data supports his assessment of conditions.
US Economy Is Made of Teflon
Data published on April 30 offered insights into how the US economy is chugging along. For the most part, numbers reaffirm that the nation is what Powell said it is: resilient.
For starters, the first-quarter gross domestic product (GDP) growth rate rebounded from the abysmal fourth-quarter performance. The economy expanded 2% to kick off the year, up from the 0.5% reading in the October-December period. This was higher than the Atlanta Fed’s GDPNow Model projection of about 1%. The advanced estimate, which will likely be revised in the coming weeks, was driven by broad-based factors: consumer spending, exports, and private investment. Government outlays also recovered from Q4’s shutdown-driven collapse.
Next, the labor market: Initial jobless claims, which measure the number of applications for unemployment benefits, declined by 26,000 to 189,000 for the week ending April 25. Not only was this print below economists' expectations, but it was also the lowest reading since 1969. Recurring claims – the number of people still receiving jobless benefits – dropped to a two-year low.
Finally, personal income surged 0.6% in March, an increase from the upwardly adjusted 0% in February. This topped the consensus forecast of 0.3%. Consumers opened their wallets, too, with personal spending increasing 0.9%. While gas prices were a factor, spending was broadly spread across goods and services.
But while the administration may turn on “Sunshine, Lollipops and Rainbows” after combing through these numbers, the black eye was the spike in consumer inflation.
The Inflation Threat
Like his predecessor, President Donald Trump is at risk of making inflation the thorn in his side.
The March personal consumption expenditures (PCE) price index rocketed to an annual rate of 3.5%, from 2.8% in February. Core PCE inflation, which strips out the volatile energy and food categories, was a bit tamer, edging higher to 3.2% from 3%. On a monthly basis, PCE and core PCE jumped 0.7% and 0.3%.
Surging gasoline prices have been the primary cause of the increase in headline inflation. This, of course, weighs on sentiment, household budgets, and spending patterns. Additionally, an elevated PCE could lead the Federal Reserve to stand pat for longer, as it is its preferred inflation gauge. As Hamlet, the prince of Denmark, said: “Ay, there’s the rub.”
Despite a new leader taking the reins at the Fed, it is no guarantee that the Eccles Building will be in rate-cutting mode anytime soon. The headline coming out of the April Federal Open Market Committee policy meeting is that the final vote to leave rates unchanged was 8-4, the first time since the fall of 1992. Only one individual championed a rate cut – Fed Gov. Stephen Miran – but the other three supported no change to the key policy rate and disagreed with keeping an easing bias in the statement.
Put simply, 11 officials have no appetite or desire to lower interest rates right now. In fact, based on Powell's remarks to reporters, the Fed is either at, or close to, a neutral rate, meaning monetary policy is neither accommodative nor restrictive for the broader US economy.
If he truly aims for lower rates, the incoming chair, Kevin Warsh, would have to convince his colleagues that now is an appropriate time to loosen policy, even with inflation firmly above the institution’s 2% target. As the youngins say, that ain’t happenin’ – and that could frustrate Trump. Be prepared for the Truth Social posts knocking Warsh.
Are Rate Cuts Needed?
Ultimately, the US economy is navigating through turbulence, ignoring tailwinds, and venturing forward, supported by consumers ready to spend, by the private sector prepared to invest, and by a global market waiting at ports to purchase American goods. This is happening even amid rising inflationary pressures. So, does the Fed need to follow through on a rate cut at all in this climate? The June meeting will be riveting as it could set the stage for what comes next.
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