Fed Stands Pat as Inflation Fight Drags On
The Federal Reserve left interest rates unchanged and signaled that a recent lack of progress on the inflation front calls for borrowing costs to remain high.
The US economy grew at a slower pace in the first quarter while price pressures held firm, further complicating the outlook for central banks as they deliberate over the appropriate path for interest rates. Gross domestic product increased at an annualized rate of 1.6% in the first quarter, according to an initial estimate from the Bureau of Economic Analysis on Thursday. That came up well short against economists’ estimate of 2.4% and the fourth quarter’s growth rate of 3.4%. The US stood out from the pack globally in 2023 as it powered ahead despite persistently high rates and inflation, and the economy is forecast to grow twice as fast as some of its peers this year including Europe, Canada and Japan, the International Monetary Fund said in updated projections last week. But weaker-than-expected growth in the first quarter came as consumer spending, government spending and exports decelerated from the end of last year.
The GDP report also revealed that the Federal Reserve’s favorite inflation gauge was hotter than anticipated in the first quarter. The core personal consumption expenditures (PCE) price index was up 3.7% on an annualized basis in the first quarter, stronger than a 2% rise in the fourth quarter. Including food and energy costs, PCE inflation hit 3.4%, up from 1.8%. A combination of slower economic growth and higher prices in the months ahead could further dial back expectations for rate cuts as the Fed attempts to wrangle inflation. During an event last week, Fed Chair Jay Powell said higher rates need more time to tamp down price pressures, adding that “it’s likely to take longer than expected” for policymakers to feel confident enough to cut rates. As global crosscurrents illustrate a murky backdrop for financial markets, PGIM’s second-quarter outlooks bring together perspectives from across affiliates to help investors capture a diverse set of opportunities.
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