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Fed and consumers align on inflation expectations

The Federal Reserve hit pause on rate hikes in January. Consumers adjusted their inflationary expectations in February. Will this change in course continue? 

The Fed hit the pause button in January in their steady march to increase rates. With inflation remaining near the Fed’s 2 percent goal, the Fed indicated the case for raising rates was weakening. “The U.S. economy is in a good place, and we will continue to use our monetary policy tools to help keep it there,” Chairman Powell stated in a press conference on Jan. 30, 2019.

The Fed raises rates when inflation heats up to slow runaway growth. A slowing U.S. and overseas economy has muted inflation concerns, leading the Fed to take a softer stance by holding rates steady.

Last year, the Fed gradually raised rates four times, increasing the cost of borrowing. With no immediate threats to economic expansion, fed officials postponed rate increases.

Joe public chimes in

The public’s inflation expectations eased as well for for both one- and three-year outlooks to 2.8% from 3% in January, according to the New York Fed’s Survey of Consumer Expectations. It was the first notable decline since April 2018.

Survey respondents said they are expecting little change in gas, college education, and rent in the next year. Significantly, medial care price growth expectations declines to a series low, with the public now seeing a 7.5% rise a year from now, down from 8.3% in January.

Whether inflationary pressures will ease long-term is uncertain. Leading up the Fed’s January decision, U.S. jobs data demonstrated that hiring and wage gains continued to be strong; the unemployment rate remained near historic lows. “Despite the positive outlook, over the past few months we have seen some crosscurrent and conflicting signals about the outlook,” Chairman Powell cautioned.

The Fed is still expected to raise rates when economic data deems it. The next Federal Open Market Committee is scheduled for March 19-20, where more clarity around conditions might cause inflation expectations to adjust course yet again.

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