Federal Reserve Faces Confirmation of Stalled Inflation Progress and Potential Shift in Interest Rate Strategy.

Federal Reserve officials are on the brink of receiving further confirmation that efforts to combat inflation have hit a roadblock, indicating a potential shift towards maintaining higher interest rates for an extended period. The preferred inflation gauge for policymakers, the personal consumption expenditures price index, is likely to show continued elevation in March, with a slight uptick to 2.6% annually due to increased energy costs.

Although the core metric, excluding volatile components like energy and food, may not match the strength of the consumer price index, Fed Chair Jerome Powell and colleagues have hinted at a prolonged timeline before considering rate cuts, emphasizing the need for greater confidence in an inflation downtrend.

As policymakers enter a blackout period before their upcoming meeting in May, fresh inflation figures will be accompanied by data on personal spending and income, with economists forecasting solid gains supported by robust job growth.

Additional data releases for the week include the government’s initial estimate of first-quarter growth, likely to have cooled from the previous period but still surpassing long-term sustainability thresholds. Various indicators of economic activity, such as a composite gauge for manufacturers and service providers, along with new-home sales data, will provide further insights.

The University of Michigan will also publish its final April reading on consumer sentiment and inflation expectations. Bloomberg Economics forecasts a slight cooling in first-quarter real GDP growth to around 2.7%, still above the longer-term sustainable pace, indicating persistent inflationary pressures.

Looking ahead, economic activity may face challenges from weak discretionary spending, as consumers become increasingly price-sensitive amid elevated inflation levels.

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