February's Consumer Price Index (CPI) reading is due out this Wednesday, March 12, as stagflation fears grip economists' forecasts. Federal Reserve officials will be convening in Washington, D.C. next week for their March FOMC meeting, where they will unveil their latest decision around interest rates on March 19.
MacroPolicy Perspectives Founder and President Julia Coronado sits down with Brad Smith and Madison Mills to talk more about this week's inflation data expectations and how the labor market could push the US central bank to cut interest rates. Coronado also serves as a member on the Federal Reserve Bank of Dallas' Academic Advisory Council.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
Recession fears are creeping into the market as investors attempt to understand the administration's ever-changing trade policy and its potential impact on inflation. The market will get its next gauge on the state of the US inflation Wednesday with February's Consumer Price Index. Joining me now, we've got Julia Coronado, Macro Policy Perspectives founder and president. Thanks so much for taking the time here with us today. Let's just start with your expectations for this next inflation reading that we're set to get this week.
Yeah, I mean, we expect that we're going to see some remaining stickiness, the kind of stickiness we've seen in recent reports, not quite as bad. We expect some progress in core inflation relative to January, but we're at a 0.3. Um, we get maybe a tick of relief on the annual rate, but, um, really, this isn't a report that's going to give a lot of relief to the Fed. We're in a period of beginning of year price resets that tends to keep core inflation a bit elevated in Q1. So we still think we're going to see some of that in the February report. Uh, and so that kind of leaves the Fed in, in the holding pattern it's been in, uh, and just waiting to see, um, how these policies that are very likely going to affect the trajectory of inflation and growth unfold in coming months.
Julia, what does it take in your view to get the Fed to really firmly put itself back on the table when it comes to the idea of the Fed put? What does it take for the Fed to come out and be more dovish? We know that the market is pricing in over 80 basis points of cuts so far this year, increasing the chances of a cut in May. How much more pain do we need to see for that cut in May to become a reality in your view?
Uh, I think we need to see more pain. Uh, so the Fed is in a very difficult position. Uh, the policies being proposed are almost certainly going to lift consumer prices, so they're not going to see the progress that they had expected to see, um, in the near future. That leaves them on the sidelines unless and until, uh, the economy really breaks. The labor market really softens, um, decisively. Uh, you know, the bar to cutting is a lot higher than it was, say, in the last trade war in 2018 when inflation was running below their target. And so as tariffs disrupted the global manufacturing economy, the Fed could take out a few insurance rate cuts just to make sure that that doesn't infect the US economy. We are not in that position. The Fed is approaching its inflation target from above. Inflation has been sticky in recent months. So it really would be the next cut is likely to be motivated by labor market weakness, and it has to be, you know, worrisome enough that they're willing to overlook the imminent threat from tariffs on inflation. So they're looking at risks to both sides of their mandates. Uh, and, and I don't think, I think May feels real early, uh, for them to be lowering rates.