Geopolitical Risk<\/strong><\/p>\nFed officials are increasingly pointing to tensions around the world \u2014 including wars in the Middle East and Ukraine and attacks on cargo ships in the Red Sea \u2014 as factors that could disrupt supply chains and rattle energy markets, upending their outlook for easing inflation this year.<\/p>\n
\u201cUncertainty lurks in numerous corners,\u201d Atlanta Fed President Raphael Bostic said last month, pointing to geopolitical risks as one reason \u201cit would be unwise to lock in an emphatic approach to monetary policy.\u201d<\/p>\n
Spot freight rates from China to southern European ports have more than doubled since the end of last year, with some ships re-routing around southern Africa. A 40% rise in shipping rates would equate to about a 10-basis-point increase in year-over-year core inflation in the US, said Stephanie Roth, chief economist at Wolfe Research in New York.<\/p>\n
While in the past companies might have absorbed the higher costs, businesses in the post-pandemic era may be more inclined to pass them along to customers again.<\/p>\n
\u201cInflation is still elevated,\u201d Roth said. \u201cIt is tough for central banks to entirely look through\u201d price shocks now, she said.<\/p>\n
Financial Conditions<\/strong><\/p>\nFinancial conditions eased markedly after Fed officials signaled they were done raising rates in December, and measures such as the Chicago Fed\u2019s national financial conditions index show that overall financing costs are looser than average.<\/p>\n
Several Fed officials, including Cleveland Fed President Loretta Mester and Governor Michelle Bowman, have warned that a continued easing could stoke demand and potentially fuel further inflation.<\/p>\n
Powell seemed determined to keep those financial conditions in check by communicating the high bar for a first rate cut last month. At a press conference following the Fed\u2019s Jan. 31 decision, he said the first move would be a \u201chighly consequential decision.\u201d He has also stood by the Fed policy committee\u2019s projection for three rate cuts this year. Futures markets are pricing in a probability of about four.<\/p>\n
\u201cThe last mile\u201d on inflation back to the 2% target \u201cis all about Fed communication,\u201d said Torsten Slok, chief economist at Apollo Management. If policymakers decide too early to signal a rate cut, that could give \u201cgreen lights for hiring and capital spending and make the last mile all that much harder.\u201d<\/p>\n
Photo: A pedestrian passes the Marriner S. Eccles Federal Reserve building in Washington, DC. Photographer: Nathan Howard\/Bloomberg<\/em><\/p>\nCopyright 2024 Bloomberg.<\/div>\n<\/p><\/div>\n
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