Chicago Fed President: May inflation data paves the way for rate cuts

According to the Zhitong Finance and Economics APP, Chicago Fed President Guerspé stated on Friday that if future inflation data is as good as the May Consumer Price Index, the Fed may consider lowering interest rates. He pointed out that a strong labor market means the Fed can rely on declining inflation as a motivation for rate cuts.

Guerspé said in a fireside chat at the Iowa Farm Bureau Economic Summit, "This data is only for one month, but it's very good."

According to the Bureau of Labor Statistics, the May Consumer Price Index remained almost flat, rising only 0.00575%, compared to market expectations of 0.1% increase. This resulted in a year-on-year growth rate of 3.3%, which is one-tenth of a percentage point lower than expectations and April's data. So far this year, the fluctuation range of the CPI has been between 3.1% and 3.5%.

The report also contains more encouraging data. The core CPI, which excludes food and energy components, rose by only 0.16% in May, marking the slowest monthly growth rate since 2021. Core prices rose by 3.4% year-on-year, lower than April's 3.6%.

Guerspé said, "If we have many months of inflation data returning to this level, we will be very confident in achieving the Fed's 2% target." This will pave the way for rate cuts.

The Federal Open Market Committee (FOMC) concluded its two-day policy meeting on Wednesday with a unanimous vote to maintain the federal funds rate within the current target range of 5.25% to 5.5%. The summary of officials' quarterly economic projections shows that the Fed's stance has become less dovish, reducing the expected three 25-basis-point rate cuts in 2024 to one.

Guerspé has been serving as the President of the Chicago Fed since January 2023. He will have voting rights in the FOMC in 2025. In addition, he is the designated alternate for the FOMC meeting on July 30th and 31st, replacing the Cleveland Fed, which does not yet have a permanent president.

He stated yesterday, "There is absolutely no problem with the employment side of the task, while the inflation side of the task is failing. In the medium term, the key to whether interest rates can be lowered is whether inflation returns to the 2% target path. If so, then we can see a rate cut."

The U.S. economy created more jobs than expected in May, but the labor market continues to show signs of slowing compared to last year's overheated levels. Employers added 272,000 non-farm jobs last month, and the unemployment rate rose by one-tenth of a percentage point to 4%