By Ann Saphir and Howard Schneider
(Reuters) – New data may point to emerging tension between the U.S. Federal Reserve’s dual inflation and employment goals, as price pressures remained sticky in January while consumer spending slowed more than expected.
Traders maintained bets the Fed will cut interest rates by a quarter of a percentage point at its June and September meetings this year, but analysts noted the situation seemed to have become more complex and could present policymakers with a difficult decision in the weeks ahead.
Hints of slowing growth alongside inflation still stuck above the Fed’s 2% target, “presents a dilemma for the Fed…if you add them together, that equals stagflation,” said Peter Cardillo, chief market economist for Spartan Capital Securities in New York. “The Fed now has a lot of worrying to do.”
Stagflation refers to the combination of slow growth and high inflation that forces policymakers to potentially choose between cutting rates by more, at the margin, to support economic growth and jobs, or maintaining tighter monetary policy to ensure inflation returns to target.
Policymakers began pointing to that possibility this week.
“The Fed could have to balance inflation risks against growth concerns,” Kansas City Fed President Jeffrey Schmid said in comments this week that noted what he felt were upside risks to inflation and concerns that uncertainty about the economic outlook could begin to weigh on growth. “There are risks that could make our monetary policy decisions increasingly difficult.”
Schmid spoke before Friday’s data showing that inflation as measured by the Personal Consumption Expenditures price index did slow in January, ticking down to 2.5% last month from 2.6% in December. The core PCE measure, excluding volatile food and energy prices, fell to 2.6% from 2.9%, the Commerce Department’s Bureau of Economic Analysis showed.
Though an improvement, progress towards the Fed’s 2% target has been slow in recent months, while concerns have mounted that price pressures could build again in the wake of import taxes the Trump administration intends to impose.
Of particular note to the Fed, as well, is a recent rise in consumers’ expectations of inflation, something that if sustained would make central bankers reluctant to ease monetary policy for fear of stoking inflationary psychology.
The same report on Friday also showed consumer spending unexpectedly dropped in January, following a sharp increase in December as households stocked up on goods ahead of the Trump administration’s telegraphed tariffs. A recent drop in consumer confidence may also point to slowing growth ahead given the U.S. economy’s reliance on household consumption.
Fed policymakers themselves say they are focused on the data to be released over the next couple of months and on assessing the actual economic fallout of Trump’s policies, including a 25% levy on imports from Mexico and Canada set to start next week, along with an increase to tariffs on China. It’s unclear, they say, how much of those higher rates will be passed on to consumers in the form of higher prices, and on how they will impact economic growth more broadly.
None have signaled any inclination to cut the policy rate, currently in the 4.25%-4.50% range, when they meet next month, and at least a few — including Fed Governor Adriana Kugler and Cleveland Fed chief Beth Hammack — say rates could stay where they are for some time unless there is an unexpected increase in the unemployment rate, which last month dropped to 4%.
Fed Chair Jerome Powell is expected to give his own updated view on the economic and policy outlook next Friday, when the government will also release its monthly employment report for February.
(Reporting by Ann Saphir; Additional reporting by Stephen Culp and Lucia Mutikani; Editing by Jan Harvey and Andrea Ricci)
