(Reuters) – U.S. economic activity expanded slightly from late February through early April and there were fears among firms that progress in lowering inflation would stall, a Federal Reserve survey showed on Wednesday, continuing recent trends that have kept the central bank from being able to cut interest rates.
The U.S. central bank released its latest snapshot on the health of the economy a day after Fed Chair Jerome Powell ditched previous guidance on when its benchmark interest rate may be cut and instead said monetary policy needs to be restrictive for longer due to a string of stronger-than-expected inflation readings.
“Overall economic activity expanded slightly … Ten out of twelve Districts experienced either slight or modest economic growth,” the Fed said in the survey known as the “Beige Book,” which polled business contacts across the central bank’s 12 districts through April 8. “The economic outlook among contacts was cautiously optimistic, on balance.”
Up until the turn of the year, Powell and his colleagues had been buoyed by data that showed inflation, which spiked to a 40-year high two years ago, drifting downwards toward the Fed’s 2% target rate, even amid strong economic growth and a low unemployment rate.
However, that momentum has halted and even reversed, calling into question whether the Fed, which in March provisionally penciled in three rate cuts this year, will be able to cut its policy rate in the coming months. Investors now only expect a first cut in September and the odds of a second cut are dwindling.
In the report, the pace of price increases was described overall by firms as modest on average, but six Fed districts noted moderate increases in energy prices and contacts in a few of them, mostly manufactures, saw upside risks in the near-term in both input and output prices.
“On balance, contacts expected that inflation would hold steady at a slow pace moving forward,” the report said.
Inflation pressures “increased modestly,” the St. Louis Fed reported, with small businesses reporting compressed profit margins due to the inability to pass on price increases to consumers.
The Philadelphia Fed said inflation continued at a “slight pace,” with increased price sensitivity by customers preventing some of its contacts from being unable to pass on increasing input prices.
The Fed is expected at its April 30-May 1 policy meeting to leave its policy rate in the current 5.25%-5.50% range, where it has been since last July.
By the Fed’s preferred measure, inflation in February ticked up to a 2.5% annual rate, while a gauge that strips out more volatile food and energy components, rose at a 2.8% annual rate.