Federal Reserve officials said this week they continue to weigh potential risks to inflation and the broader US economy that could make the journey back to their 2% target more challenging. The Fed has not been swayed after witnessing back-to-back months of weaker consumer inflation and rate cuts by central banks in other parts of the world, standing firm behind a wait-and-see approach before easing borrowing costs. Fed Governor Michelle Bowman said in a Tuesday speech there are “a number of upside inflation risks” affecting her outlook, adding that she remains willing to raise rates further if necessary. Mary Daly, President of the San Francisco Fed, said there is “more work to do” to restore price stability but cautioned that inflation is “not the only risk we face,” citing the potential for higher unemployment.
Rate-setters at the Fed may heed lessons from recent developments in Canada, where investors received disappointing news on Tuesday with the arrival of a hotter-than-expected inflation report just weeks after the Bank of Canada cut its policy rate by 25 basis points. The Fed’s preferred measure of inflation will be updated on Friday, and economists were optimistic that the personal consumption expenditures (PCE) report will mirror earlier inflation data for May. Estimates indicated that the annual rise in the core PCE price index likely cooled to 2.6%, compared with 2.8% in April. PGIM Fixed Income Chief US Economist Tom Porcelli discussed inflation, interest rates and the economic outlook in a webinar hosted by CFA Institute.
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