With the Fed possibly not cutting rates until May, CFOs can no longer price their way out of this environment, says an economist

The central bank’s Federal Open Market Committee announced on Wednesday that it’s maintaining the target range for the federal funds rate at 5.25% to 5.5%, the fourth straight pause since July. The Fed raised its benchmark interest rate a total of 11 times in 2022 and 2023 in an attempt to cool off inflation.

“Inflation has eased from its highs without a significant increase in unemployment,” Federal Reserve Chair Jerome Powell said during a news briefing. But it’s still too high, and the “ongoing progress in bringing it down is not assured, and the path forward is uncertain,” Powell said.

The committee said in its official statement that it doesn’t expect to reduce the target range until it has gained greater confidence that inflation is moving toward 2%. Inflation hit a four-decade high 18 months ago.

In December, core personal consumption expenditure (PCE) inflation slowed to 2.9% year over year. The Fed prefers PCE as an inflation measure over the consumer price index. Powell explained that the inflation data over the past six months is encouraging, but the committee still seeks more data. And Powell said he doesn’t think it’s likely the committee will reach a level of confidence by the time of the March meeting.

A May rate cut seems more likely, Gregory Daco, chief economist at EY, told me. The Fed will be paying very close attention to the upcoming PCE inflation readings to gauge whether they do have that greater confidence, Daco said. “Inflation bumpiness is what the Fed is wary of,” he added. 

Powell said he and his colleagues are “acutely aware” that high inflation “erodes purchasing power,” especially for those least able to pay the rising costs for food, housing, and transportation. But that doesn’t make it easier for those consumers who are experiencing cost fatigue, nor for businesses facing spending decisions of their own, Daco said.

With rates still high, Daco said he often talks to CFOs about planning for multiple scenarios. It’s important to understand supply-side inflation drivers and how they fit into your company’s ecosystem, and to not surrender market share through inadequate pricing strategies.

“Having just a baseline case is no longer sufficient in this highly uncertain environment,” he said. “You can’t price your way out of this environment anymore.”

Sheryl Estrada
[email protected]

Leaderboard

Stacy McLaughlin was named CFO at Splash Beverage Group, Inc. (NYSE American: SBEV), a portfolio company of beverage brands, effective Jan. 24. Before joining Splash, McLaughlin was the CFO of Material Technologies Corp. She was also previously VP and CFO of Willdan Group, Inc. Before that, McLaughlin was from senior associate at Windes & McClaughry Accountancy Corporation, and senior audit associate at KPMG LLP.

Victor Hwei was named CFO at Oomnitza, a provider of enterprise technology management solutions. Most recently, Hwei served as the leader of the finance, strategy, and corporate development teams at Pantheon. Before that, he held multiple operational and financial leadership roles at New Relic. Hwei's experience also includes positions as an investment banker at Morgan Stanley and UBS. 

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