Fed to focus on inflation as energy costs squeeze households

Neil Dutta, partner and head of economic research at Renaissance Macro Research, said the Federal Reserve is likely to prioritize controlling inflation as higher energy costs reduce household purchasing power and a slowdown in capital spending could slow growth.

Dutta noted Fed officials are watching inflation data closely to determine what level would prompt a change in policy. He said core inflation is not sharply accelerating but remains above the Fed’s target, leaving pressure on policymakers to act.

Rising fuel and utility bills have shrunk household budgets and reduced spending on other goods and services, Dutta said. Lower consumer spending can affect overall growth and influences how aggressive the Fed needs to be to slow price pressures.

Business investment has been a major support for the economy. Dutta described the current surge in capital expenditures as “the biggest capex boom we’ve seen in our careers” and warned that a pullback in capex would weigh on equity market gains and could have broader macroeconomic effects.

On the labor market, Dutta reported stability compared with several months ago. Wage growth remains sluggish, which he interpreted as a sign the job market is not especially tight. He added that employment breadth has improved, supported in part by nonresidential construction and a data-center build-out that is boosting jobs in specific sectors.

Dutta said central bankers are inclined to favor higher interest rates given the current indicators. He argued that stronger inflation or signs of reacceleration would raise the threshold for easing policy.

Dutta is partner and head of economic research at Renaissance Macro Research and holds a bachelor’s degree in economics and political science from New York University.