Fed Won't Crack Under 'Eggflation' Pressure as Core Trends Improve
Federal Reserve Chair Jerome Powell emphasised the central bank's cautious stance on interest rate cuts during his recent congressional testimonies, a position bolstered by yesterday's inflation data. The January Consumer Price Index (CPI) showed headline inflation rising 0.5%mom to 3.0%yoy, whilst core inflation, excluding volatile food and energy prices, increased 0.4%mom to 3.3% annually.
The data, which represented the largest monthly increase since August 2023, prompted a swift market reaction. US Treasury yields surged, whilst equity futures declined and the dollar strengthened. Notably, shelter costs accounted for nearly 30% of January's increase, with both owners' equivalent rent and primary residence rent rising 0.3%. The grocery sector also experienced significant price pressures, with egg prices alone contributing two-thirds of the food price increases.
However, beneath the headline figures, several encouraging trends emerged. Food prices, which had been a major concern for two years, have largely stabilised and are now running below the overall inflation rate, with the notable exception of egg prices. Core measures, including the Fed's "supercore" (services excluding shelter), showed decreases, supporting the broader disinflation narrative. Even the January uptick in sticky price inflation appears to be largely seasonal, reflecting the typical clustering of price increases at the start of the year.
During his testimonies Powell maintained that the economy remains robust, characterising the labour market as "largely in balance." However, he stressed that inflation, though easing, continues to run "somewhat elevated" above the Fed's 2% target. "The economy is strong, and we have the luxury of being able to wait and let our restrictive policy work to get inflation coming down again," Powell stated.
The Fed Chair also addressed various political challenges, carefully sidestepping questions about Trump's proposed trade policies, including potential new tariffs on China, Mexico, and Canada. Powell emphasised that whilst it was not the Fed's role to comment on tariffs directly, the central bank would respond through appropriate monetary policy adjustments if necessary. Throughout the proceedings, Powell repeatedly emphasised the Fed's independence and commitment to data-driven decision-making, arguing that maintaining political neutrality leads to better policy outcomes and lower inflation.
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