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The White House and Wall Street will be closely monitoring Wednesday's inflation report to assess the impact of the Federal Reserve's aggressive measures to control inflation.
After a significant decline last year, inflation has accelerated in recent months. Stubbornly high prices have compelled the Fed to postpone anticipated interest rate cuts, keeping borrowing costs elevated for items ranging from credit cards to mortgages. Economists predict a 3.4% increase in prices for April compared to a year ago, a slight moderation from the previous month.
While price hikes have eased from their peak of about 9%, inflation remains more than a percentage point above the Federal Reserve's target rate of 2%. A spike in housing and gasoline prices at the start of the year has prolonged the period of elevated inflation. Meanwhile, strong economic performance has boosted consumer demand, putting upward pressure on prices.
In response to elevated prices, the Fed recently decided to maintain interest rates for the sixth consecutive time, at levels last seen in 2001. The Fed has mostly abandoned its earlier forecast of three quarter-point rate cuts for this year.
Speaking at a financial conference in Amsterdam, Fed Chair Jerome Powell acknowledged that inflation has remained higher than anticipated, necessitating the continuation of high interest rates. Powell emphasized the need for patience, stating that the Fed's tight policy stance needs time to have an effect. High borrowing costs typically dampen consumer and business spending, leading to a slowdown in the economy and reduced demand.
Recent economic indicators suggest a slowdown. A disappointing jobs report indicated that employers added 175,000 jobs in April, a significant decrease from the previous month. However, this news led to a rise in the stock market, as investors interpreted it as a sign that the Fed might reconsider interest rate cuts.
The Commerce Department reported a 1.6% annual growth in gross domestic product (GDP) for the first three months of the year, a sharp deceleration from the 3.4% annual rate recorded in the final quarter of last year.
Despite the slowdown, economic output and hiring remain robust. The recent surge in prices, however, has been relatively short-lived.
Powell noted that predicting future price trends is challenging, stating that it's unclear whether inflation will persist. He emphasized the need for more data before making a judgment on inflation's future trajectory.