Fed May Raise Rates Higher for Longer After January Data; BOJ Gov. Nominee Says Merits of Monetary Easing Outweigh Side Effects

The U.S. economy is showing signs of strength. Inflation and consumer spending data released Friday indicate that the Federal Reserve may need to raise interest rates higher than anticipated in December. In addition, the Japanese government’s nominee for the Bank of Japan’s next governor said Monday that he believes the benefits of monetary easing are bigger than the costs. These developments suggest that the Fed is likely to continue raising rates shortly.

Inflation Firmed, and Consumer Spending Jumped in January

The personal-consumption expenditures price index-the Fed’s preferred gauge of inflation-was up 5.4% in January from a year earlier, after rising 5.3% in December, the Commerce Department said Friday. The core PCE-price index, which excludes food and energy prices, rose 4.7%, also ticking up from December. The central bank aims for 2% annual inflation. The data also showed that consumer spending jumped by 4.3% in January, the highest rate since April 2020.

Fed’s Jefferson Says High Inflation May Come Down ‘Only Slowly’

On Friday, Federal Reserve Gov. Philip Jefferson said that the strong job market might make it hard for the U.S. central bank to bring down inflation. He noted that wage growth has slowed somewhat over the past year but is still running too high to return inflation to the Fed’s 2% target “in a timely and sustainable fashion.”

Fed’s Collins Sees Initial Signs of Slowing Goods-Price, Wage Inflation

Federal Reserve Bank of Boston President Susan Collins said on Friday that improvements to inflation have taken longer than expected but seem to have arrived. She noted that recent data shows that goods-price inflation and wage inflation have started to slow, suggesting that the Fed may be able to bring inflation back to its 2% target.

Related Facts

• The U.S. economy will account for a third of global growth this year.
• The Federal Reserve is aiming for 2% annual inflation.
• The U.S. consumer spending data released Friday showed a 4.3% jump in January.
• The Federal Reserve will likely keep raising interest rates in the coming months to cool price pressures.
• The Japanese government’s nominee for the Bank of Japan’s next governor said Monday that the benefits of monetary easing are bigger than the costs.

Key Takeaway

The U.S. economy is showing signs of strength. Inflation and consumer spending data released Friday indicate that the Federal Reserve may need to raise interest rates higher than anticipated in December. In addition, the Japanese government’s nominee for the Bank of Japan’s next governor said Monday that he believes the benefits of monetary easing are bigger than the costs. These developments suggest that the Fed is likely to continue raising rates shortly.

Conclusion

The strong economic data released Friday and the comments from the Bank of Japan’s next governor suggest that the Federal Reserve will likely continue raising interest rates with inflation under control. However, it is important to note that the Fed aims for 2% annual inflation so that the rate increases may be gradual and not too drastic.