Has the FED managed to tame inflation in the United States?

This should be the year in which inflation in the US took the final step towards 2%, a target set by the FED and other Central Banks, allowing the Federal Reserve to steadily reduce interest rates from a two-decade high. Now, these expectations have been dashed and it appears that the FED has failed to completely tame inflation.

Price gains turned out to be much stickier than expected a few months after 2024, in a context of a resilient economy and labor market. On Tuesday, Fed Chairman Jerome Powell said persistent inflation means borrowing costs will remain high for longer than previously thought, a change in tone with ramifications for policy around the world.

Persistent housing shortages are partly to blame, as are rising commodity prices and car insurance premiums. But some also point to Powell himself for prematurely telegraphing interest rate cuts, which sparked optimism in financial markets and fueled economic activity.

“They simply got the inflation picture wrong,” said Stephen Stanley, chief U.S. economist at Santander US Capital Markets LLC. “The mistake they made was they got really enchanted by the combination of really strong growth and benign inflation that we saw in the second half of last year.”

Traders now expect just one or two rate cuts this year. That’s a far cry from the roughly six they expected in early 2024 and the three Fed officials set just a month ago. Investors and economists signal the possibility of no cuts this year.

Fed officials maintain that inflation is still generally on a downward trend, but they also stressed that borrowing costs will not decrease until they are more confident in that trajectory.

While much of the inflationary damage has been most evident in the consumer price index – which accelerated to 3.5% in March from a year earlier – the Fed’s preferred metric is the personal consumption expenditures price index. The PCE has been closer to the central bank’s 2% target – recording 2.5% in February – but progress on that indicator has also stalled.