Inflation has been a thorn in the Federal Reserve’s side, and despite some progress, policymakers are keeping a watchful eye on potential upside risks that could prevent them from pivoting to rate cuts anytime soon.

In a speech at the Shadow Open Market Committee gathering in New York, Fed Governor Michelle Bowman echoed the sentiments of her colleagues, warning that a failure of price pressures to continue decreasing might even push the central bank to raise rates again.

“While it is not my baseline outlook, I continue to see the risk that at a future meeting, we may need to increase the policy rate further should progress on inflation stall or even reverse,” Bowman cautioned.

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• Fed officials warn upside inflation risks could force further rate hikes.

• Strong jobs data and sticky inflation dampen prospects for imminent rate cuts.

• Policymakers stress patience, closely watching upcoming inflation data

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Fed Officials Remain Cautious on Rate Cuts Amid Persistent Inflation Risks

Lorie Logan, President of the Federal Reserve Bank of Dallas, joined the chorus and emphasized that it’s “much too soon to think about cutting interest rates.” 

Logan believes more clarity is needed on the economic trajectory before any rate reductions can be considered.

Fed officials’ key concern is that inflation could stall out at current levels, undoing the progress made so far in bringing it back to the 2% target. 

This apprehension has been amplified by recent economic data, including a robust jobs report that showed better-than-expected 303,000 payroll additions in March, accompanied by a drop in the unemployment rate to 3.8%.

The strong labor market has reinforced the idea that the Fed can maintain its current monetary policy setting, with the federal funds rate between 5.25% and 5.5%, to lower inflation without causing broader economic turmoil.

As a result, market expectations for rate cuts have been tempered, with traders seeing almost no chance of a cut at the May Federal Open Market Committee (FOMC) meeting and a split on the prospects of a June easing.

While the FOMC had previously projected three rate cuts for this year, the recent data has pushed back against the urgency for such moves, according to economists. 

The evolution of consumer price inflation remains the key determinant in the short term, with the March consumer price index report scheduled for release next Wednesday.

Fed officials, including Chair Jerome Powell, have emphasized the need for patience as they navigate the path to price stability. 

The combination of strong economic data and limited progress on inflation in recent months has amplified calls for caution as policymakers aim to strike the right balance between supporting economic growth and taming persistent inflationary pressures.

As the Fed grapples with these challenges, one thing is clear: upside risks to inflation remain a significant concern, and officials are determined to stay the course until they are confident that price pressures have been firmly controlled.