Fed officials lean into cautious stance as inflation concerns weigh on central planners

• Fed policymakers' comments will be watched closely by investors this week.
• Markets see a waning probability of a Fed policy hold in September.
• Fed rate outlook could influence the risk mood and the US Dollar's valuation.

Federal Reserve (Fed) policymakers are scheduled to deliver speeches this week as investors reassess the interest rate outlook following the April Consumer Price Index (CPI) data. According to the CME FedWatch Tool, the probability of a no change in the Fed's policy rate in September holds around 35%.

Federal Reserve Bank of Cleveland President Loretta Mester leaned into further caution on rate expectations on Monday. During an interview with Bloomberg, Fed President Mester noted that she no longer thinks three rate cuts in 2024 is appropriate.

Mester comments:

Inflation risks are tilted to the upside.

I don't think about a potential rate cut in terms of "when".

There's no risk in spending more time gather data on inflation because the economy is strong.

Monetary policy is moderating demand, but not as fast as expected.

Mester still believes inflation will come down.

Fed can hold rates, or even raise them, if inflation, against expectations, stalls out or reverses.

No longer think three rate cuts this year is appropriate.

Federal Reserve Bank of San Francisco President Mary Daly noted on Monday that, while she expects shelter inflation to slowly improve, the Fed policymaker doesn't expect progress to be quick. Fed's Daly also noted that she is not confident that inflation is sustainably coming down to the Fed's 2% inflation target.

Fed Governor Christopher Waller refrained from commenting on the policy or the economic outlook in a prepared speech on Monday, Fed Vice Chair for Supervision Michael Barr said that the Fed is in a good position to hold the policy steady and watch the economy, per Reuters. Meanwhile, Fed Vice Chair of the Board of Governors Phillip Jefferson acknowledged that April's better inflation reading was encouraging and added that it was too early to tell if the recent slowdown in disinflationary process will be long-lasting.

Fed's Jefferson: Too early to tell if recent slowdown in disinflationary process will be long-lasting.

Fed's Barr: Fed in good position to hold steady and watch economy.

Earlier in the day, Bostic said that it is going to take a while before they are certain that inflation is going back down to 2%.

Fed's Bostic: Fed is open to all possibilities on path of economy.

The Fed has adopted a cautious tone regarding the timing of the policy pivot following the stronger-than-expected inflation readings in the first quarter of the year. The US Bureau of Labor Statistics reported on Wednesday that the core Consumer Price Index (CPI) rose 3.6% on a yearly basis in April. This reading followed the 3.8% increase recorded in March and came in line with the market expectation. On a monthly basis, the CPI and the core CPI both rose 0.3% after rising 0.4% in March. The US Dollar (USD) came under bearish pressure as market participants assessed the inflation data and the USD Index fell to its lowest level in over a month, losing over 0.7% on a weekly basis.

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Fed policymakers' comments from previous week

Federal Reserve (Fed) Board of Governors member Michelle Bowman said on Friday that progress on inflation may not be as consistent as many hoped.

Fed Bowman additional comments

Inflation's decline in the latter half of last year was temporary.

We have not seen further progress on inflation this year.

US economic activity may have moderated, but consumer services spending is strong, and business investment has strengthened.

Progress on the labor market rebalancing has slowed.

Focusing on issues like climate change could distract bank management and supervisors.

My baseline outlook is that inflation will decline further with the policy rate steady, but I see risks.

I will remain cautious in rate change decisions, I am willing to hike if inflation progress stalls or reverses.

Inflation is to remain elevated for some time.

Federal Reserve (Fed) Bank of Atlanta President Raphael Bostic appeared late Thursday alluding towards the possibility of late-2024 rate cuts, but cautioned the need for patience on interest rates.

Fed Bostic additional comments

"I am pleased with inflation progress in April but the Fed is not yet there."

"The Fed has to be patient and vigilant."

"There is still a lot of pricing pressure in the economy."

"I am hearing businesses say they are at the limits of pricing power and not able to fully pass-through input costs."

"Firms can't 100% pass through prices, the economy is slowing."

"It could be appropriate to reduce rates toward year-end."

"My outlook right now is for a continued fall in inflation, which would make appropriate to reduce rates later in the year, but nothing not locked in."

"I expect inflation to fall slowly, continued economic momentum."

"I have to be open to a broad range of possibilities, with a number of different scenarios that could play out."

Loretta Mester, President of the Federal Reserve Bank of Cleveland, emphasized that maintaining the current levels of Fed policy will aid in returning still-elevated inflation to the 2% target.

Fed Mester additional comments

"Current restrictive policy will help lower inflation."

"Monetary policy is well-positioned as the Fed reviews more data."

"It will take longer to gain confidence that inflation is moving towards 2%."

"Strong economy means Fed risking little to hold policy in place."

"Risks to inflation side of the Fed mandate have increased."

"Downside risks to growth, hiring have fallen."

"Expecting gradual progress on lowering inflation."

Richmond Federal Reserve Bank President Thomas Barkin told CNBC on Thursday that the latest Consumer Price Index (CPI) showed that inflation is not where the Fed is trying to get.

Fed Barkin additional comments

"Companies are still saying there is no crime in trying to raise prices."

"Services in particular still feel they can raise prices."

"Latest retail sales numbers point to a good but not great consumer spending."

"Overall, labor market numbers are normalizing."

"Jobless claims are low by historic standards but may be edging up."

"I do believe inflation is coming down, but will take more time."

"The question now is for how long rates need to be held where they are to get the required impact on inflation."

"The inflation story is much longer term than what happens in the market."

"Labor market conditions are strong."

Federal Reserve Bank of New York President John Williams said that the doesn't see the need for a rate cut in the near term. Commenting on the April Consumer Price Index (CPI) data, "kind of a positive development after a few months, where the data were disappointing," Williams told Reuters in an exclusive interview.

Fed Williams additional comments

"Overall trend for slowing inflation looks good."

"Optimistic inflation will continue to retreat."

"Still lack confidence inflation is moving sustainably to 2%."

"Monetary policy is restrictive and it's in a good place."

"No current need to raise interest rates."

"Economy is moving into better balance."

"Job market is still tight, but excesses are waning."

"Hopeful job market can balance without big rise in unemployment."

"Expecting unemployment to rise to 4% this year."

"Seeing inflation in low 2% range by year-end, around 2% next year."

"Need not wait until inflation exactly at 2% to ease policy."

"Balance sheet policy changes aimed at limiting market impact."

"Fed balance sheet is still having a modest impact on yields."

"No major signs of financial market risk."

"I am pleased with inflation progress in April but the Fed is not yet there."