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US inflation still ‘hot’ but rate pause imminent

By Charbel Kadib
5 minute read

Cost pressures intensified over the past month in the United States, according to the latest data, but this won’t dissuade the Fed from halting its monetary policy tightening cycle. 

The US Bureau of Labor Statistics has released its latest monthly consumer price index (CPI), reporting a 0.4 per cent rise over the month of April — an acceleration from the 0.1 per cent increase in March. 

However, when adjusted, annualised inflation slowed from 5 per cent in the 12 months to March 2023 to 4.9 per cent.

Core inflation also eased, down from 5.6 per cent to 5.5 per cent. 


Notably, the April result reflected a marked reduction in services costs (excluding housing and energy), slowing to 0.2 per cent month-on-month. 

According to James Knightley, chief international economist at ING Economics, inflation is “still too hot”, but the latest improvement would be particularly pleasing to the Federal Reserve as it considers its next monetary policy move.  

“The Fed has made a big play of focusing on the services ex-energy and housing as this is where the tight labour market could keep upward pressure on wages and it is in these sorts of services where that is most likely to feed through into pricing,” he said.

Supporting continued disinflation over the second half of 2023, Mr Knightley added, would be an easing in corporate pricing and the cost of housing.  

This trajectory would support an adjustment to the Fed’s monetary policy stance in the near-term, with Mr Knightley anticipating a pause to the tightening cycle in June, following a cumulative 500 bps in interest rate hikes.  

A prolonged pause would pave the way for rate cuts at the back end of the year. 

“[While] we don’t think the Fed will need to see 2 per cent annual inflation achieved before considering rate cuts, we do need to be consistently hitting 0.2 per cent or 0.1 per cent month-on-month,” he said. 

“That is possible, we think, late in the third quarter into the fourth quarter given the clear topping out in housing rents, which should be increasingly reflected in the shelter CPI components as we head into the third quarter (shelter is over 40 per cent of the core CPI basket) and weakening corporate pricing power.”

Moreover, if the lagged impact of the Fed’s rate tightening and mounting evidence of weakening credit conditions weigh heavily on aggregate demand and employment conditions, momentum would “increasingly swing towards rate cuts”. 

“Right now, markets are pricing a 25 bp cut as soon as September,” Mr Knightley observed.

“That may be a little early, but we think November and December are looking decent bets for the Fed moving policy to a more neutral setting.”

The Federal Reserve recently published its latest Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), reporting a tightening of lending standards and weakening demand for credit over the first quarter of 2023.

Of the banks surveyed by the Fed, 46.1 per cent reported “somewhat” or “considerable” tightening of lending standards for commercial and industrial (C&I) loans to medium-sized and large businesses, and 48.1 per cent noted tighter conditions for small business credit.

When asked why their standards tightened, a majority share of respondents cited a less favourable or uncertain outlook (93.7 per cent), a deteriorating risk appetite (74.5 per cent), worsening industry conditions (55.8 per cent), and a deterioration or expected deterioration in their liquidity position (53.2 per cent).

For lending to households, 73.8 per cent of respondents noted tighter standards for the provision of credit used for construction or the purchase of land, with 66.7 per cent of surveyed banks noting tighter lending for residential property transactions.

Supply-side tightening was compounded by subdued demand from borrowers across the same categories.

Approximately 65 per cent of surveyed banks flagged weaker demand among medium and large firms, with demand among smaller businesses also weaker over the quarter (61.7 per cent).

Weaker demand was more evident for lending to households, with 72.1 per cent flagging subdued flows for credit used for construction and the purchase of land, and 79.4 per cent noting weakness for home loans.

The Fed’s latest lending statistics come amid continued banking sector volatility, sparked by the collapse of four US financial institutions — First Republic, Silicon Valley Bank, Signature Bank, and Silvergate Capital — and the demise of Swiss giant Credit Suisse.

The Federal Deposit Insurance Corporation (FDIC) released a report last month relating to its supervision of Signature Bank in the lead up to its failure and subsequent acquisition by local peer New York Community Bancorp. 

Conducted at the request of FDIC chair Martin J Gruenberg, the report identifies the causes of Signature Bank’s failure and assesses the FDIC’s supervisory program. 

According to the review, the “root cause” of Signature Bank’s failure was “poor management”, linked to the board of directors and management’s pursuit of “rapid, unrestrained growth”.

This pursuit reportedly lacked “adequate risk management practices and controls appropriate for the size, complexity, and risk profile of the institution”.

Reflecting on the FDIC’s own supervision, the review noted the regulator conducted several targeted reviews and ongoing monitoring; issued supervisory letters and annual roll-up reports of examination (ROEs); and made a number of supervisory recommendations to address concerns. 

However, the FDIC has conceded it could have “escalated supervisory actions sooner” and acknowledged the need for “timelier” and “more effective” communications with Signature Bank. 

But Fed chair Jerome Powell has insisted the banking system remains “sound and resilient”.

US inflation still ‘hot’ but rate pause imminent

Cost pressures intensified over the past month in the United States, according to the latest data, but this won’t dissuade the Fed from halting its monetary policy tightening cycle. 

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