The internal division within the Federal Reserve regarding potential interest rate cuts this year has become notably pronouncedAmong a total of 19 officials, half predict at least three cuts will occur within the year, while the remaining members foresee two cuts or even fewerNotably, within this latter group, two officials anticipate the Fed will refrain from making any cuts at all this year, and one staunch "hawk" even suggests that cuts may not materialize until the end of next year.

“Based on the recent data, reducing the number of rate cuts or further postponing them is appropriate,” stated one official.

Among the essential inflation indicators that the Fed closely monitors, the Personal Consumption Expenditures (PCE) price index for February was released, showing a month-over-month increase of 0.3%, with January’s figures revised up to 0.4%. The year-over-year growth for February clocked in at 2.5%, up from January’s 2.4%. The core PCE index, which excludes food and energy, increased 2.8% year-over-year and rose 0.3% month-over-month.

The Fed has set an annual inflation target of 2%, yet the core PCE index has not dipped below this mark for three years.

Moreover, consumer spending experienced a notable month-over-month surge of 0.8% in February, significantly surpassing the anticipated 0.5%. This spike may signal an intensifying inflationary pressure

Personal income grew by 0.3% month-over-month, slightly below the anticipated 0.4%, which marked a slowdown from January's sizable increase of 1%.

These figures are hardly what the Federal Reserve hoped to see, triggering ongoing debates about monetary policy among officials.

With the U.Scontinuing to experience stubborn inflation data, disagreements among Federal Reserve officials regarding the timing of potential interest rate cuts have surfaced.

“We are faced with a scenario where if we relax our policy too much or too quickly, we might see inflation resurge; conversely, if we delay our policy easing too long, we could inflict unnecessary harm on employment and people's livelihoods,” acknowledged Powell, highlighting the inherent risks tied to monetary policy.

On the same day the inflation data was released, U.S

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stock markets were closed due to a public holidayAs of the last trading session, the three major stock indices exhibited mixed results.

Persistent Inflation

Waller's "hawkish" stance stems from a recent collection of disappointing data points in his view—including GDP growth, job numbers, and inflation rates—all of which have exceeded expectations.

To delve deeper, let's examine the GDP growth numbersOn March 28, the U.SDepartment of Commerce released revised data revealing that for the fourth quarter of 2023, GDP grew at an annualized rate of 3.4%, a 0.2 percentage point increase from prior estimates.

Analysts assert that this upward revision indicates the U.S

economy remains on a strong growth trajectory, though it’s anticipated that GDP growth will moderate to a “healthy” level of 2% in the first quarter of this year, with a sustainable long-term growth rate around 1.8%.

Furthermore, the non-farm employment figures have consistently beaten expectations, illustrating a robust labor market.

On the inflation front, the Consumer Price Index (CPI) for February rose by 0.4% month-over-month, aligning with market anticipations while exceeding January’s 0.3% increaseYear-over-year, the CPI saw a 3.2% rise, surpassing both market expectations and January’s rise of 3.1%.

Excluding food and energy, the core CPI also rose 0.4% month-over-month, consistent with January’s increase but above the market expectation of 0.3%. The core index year-over-year growth rested at 3.8%, above the anticipated 3.7% yet below January’s 3.9%.

Following the FOMC meeting in March, the economic projections indicated that the Fed expects this year’s PCE to be at 2.4%, remaining flat from the previous December’s projection; for 2025, the projection is 2.2%, slightly higher than December’s prediction of 2.1%.

In terms of core PCE, which excludes food and energy prices, the forecast for 2024 stands at 2.6% compared to December’s expectation of 2.4%; projections for 2025 and 2026 see figures of 2.2% and 2.0%, respectively, maintaining the December predictions.

Despite the core PCE index's exclusion of energy prices, it's important to highlight that rising gasoline prices have made inflation more stubborn in the first quarter.

Data from the American Automobile Association (AAA) shows that as of March 27, the average price of unleaded gasoline across the nation had reached $3.54 per gallon, marking a 3% increase from the previous year and approximately a 14% rise since the start of the year.

According to the U.S

Department of Labor, in February, both gasoline and housing costs collectively contributed over 60% to the year-over-year increase in the CPIThis marks the first time since September of the previous year that fuel expenditures have surged.

A recent report from Bank of America highlighted, “Even after a recent wave of increases, we still see upside risks in gasoline prices.”

Waller remarked that he hopes to see “at least several months of improving inflation data” before any rate cuts are consideredHe emphasized that the strength of the economy and employment gives the Fed space to be more patient, underscoring the need for confirmation that inflation trends toward the 2% target.

“If I were Powell, what would be the real motivation for lowering rates now? The economy is performing well, the unemployment rate is below the neutral level the Fed considers, and even their long-term forecast shows inflation rates exceeding the target,” stated Oksana Aronov, head of market strategy and fixed income at JPMorgan.

“In the absence of any crashes, it’s hard to see a rationale for the Fed to act.”

Internal Divisions

During the FOMC meeting held on March 20, the Federal Reserve opted to maintain the federal funds rate within the 5.25% to 5.50% range for the fifth consecutive time, as anticipated by the market

The latest dot plot indicates that by the end of 2024, the policy rate might drop to a range of 4.5% to 4.75%, reflecting three cuts amounting to a total of 75 basis points, aligning with projections made in December.

However, the dot plot reveals a significant division among Fed officials concerning the number of rate cuts expected this year.

Out of the 19 officials, 10 expect at least three cuts this year, while the remaining nine anticipate two or fewerAmong those nine, two believe the Fed will remain steady this year, while one hawkish individual is adamant that there will be no cuts until the end of next year.

On March 25, several Federal Reserve officials shared their perspectives.

Chicago Fed President Goolsbee forecasted three rate cuts this year, but refrained from speculating on the timing for these adjustments, stating, “We are in a period of uncertainty that requires us to balance dual mandates.”

The Atlanta Fed's Bostic, who holds a voting position this year and was previously considered a dove, has expressed, on at least two occasions, that he expects the Fed will probably only make one rate cut this year instead of the previously anticipated two

Furthermore, he indicated that cuts may start later than initially expected, as his confidence in a return to the 2% inflation target has waned.

He articulated that as long as economic conditions remain stable, the central bank could exercise patience, stating, “The risks of meeting our employment and inflation goals are shifting toward a better balanceStill, a complete return to price stability may require a careful easing of monetary policy over time.”

Bostic underscores that premature rate cuts could be detrimentalHis stance aligns with former U.STreasury Secretary Lawrence Summers, who has long cautioned against early rate cuts and posits that the neutral rate is significantly higher than the Fed's estimation, being closer to 4% rather than 2%.

Fed Governor Cook emphasized that the bank must approach rate cuts cautiously to allow time for inflation to slow in specific sectors of the economy.

Though inflation shows no signs of rapidly cooling off and the Fed's officials are increasingly vocal about their hawkish views, the market still speculates that the Fed is likely to initiate rate cuts in June.

FXTM's Chief Analyst for Chinese Markets, Yang Ao, relayed to reporters that Waller indicated a need for “at least a couple of months of encouraging inflation data” before any rate reductions could be considered, suggesting that rate cuts may be delayed or scaled back