Another hotter-than-expected inflation reading is fueling investor fears that the Federal Reserve will have to push back the number and timing of interest rate cuts this year.
The Consumer Price Index (CPI) rose 3.5% over the prior year in March, an acceleration from February’s 3.2% annual gain in prices and more than economists expected.
The year-over-year change in the so-called “core” CPI — which excludes volatile food and energy prices — was 3.8%, which was the same level as Febuary but a tenth of a percent higher than expected.
“There is no doubt this is somewhat disappointing,” Greg Daco, EY chief economist, said on Yahoo Finance Live, adding that “there is no denying that this firmer inflation print does put more pressure on policy makers to sustain likely a higher-for-longer monetary policy stance.”
Investors agree. The stock market fell following the CPI release and the odds in favor of a June rate cut from the Fed evaporated, stomping out what had been a common-held belief on Wall Street.
Traders who had been betting on a June cut now see a roughly 81% chance the Fed does nothing in June and a roughly 44% chance of a cut in July.
They also scaled scaled back the number of rate cuts they see this year to two, less than the median of three penciled in by Fed officials at their last policy meeting in March.
Some Fed officials have been warning that the number of cuts they expect in 2024 could be scaled back if inflation continues its hot start to 2024 and the economy keeps accelerating.
Atlanta Fed President Raphael Bostic, who has scaled back the number of rate cuts he sees this year to only one, told Yahoo Finance Tuesday that he can’t “take off the possibility that rate cuts may even have to move further out.”
Bostic also didn’t rule out zero rate cuts for 2024.
The March report for CPI marks the third month in a row inflation has proven hotter than expected. And the month-over-month increases for CPI and core CPI in March were 0.4%, which were both higher than anticipated.
“Anything worse than 0.2% prints pushes up 3-month and 6-month annualized rates near to or above 3% in the coming months and prevents the year-over-year rate from dipping to 2.5% or lower by the April data,” Matthew Luzzetti, chief US economist for Deutsche Bank Securities, said in a research note.
The hot start to 2024 “is basically telling the Federal Reserve they are not getting that consistent downward movement towards the 2% that they want to see,” Victoria Fernandez of Crossmark Global Investments told Yahoo Finance Live.
“It puts pressure on them to keep rates at an elevated level,” she added.
A higher inflation report also follows a strong labor report Friday that showed the US economy generated more jobs than expected in March while the unemployment rate ticked lower and wage growth remained steady, putting the labor market on firmer footing than many economists had predicted.
“The Federal Reserve is not nearly as restrictive as they think,” said Joe Davis, chief global economist at Vanguard.
“I have been confused as why the rush to cut. The data coming in on the labor market and today’s inflation report show concerns of racing to soon to cut. There are still embers of inflation here and there in the economy.”
Other Fed officials have poured cold water on near-term hopes for an easing of monetary policy.
“I believe it’s much too soon to think about cutting interest rates,” Dallas Fed president Lorie Logan said in a speech Friday. “I will need to see more of the uncertainty resolved about which economic path we’re on.”
Fed Governor Michelle Bowman also voiced concerns Friday, even saying the Fed may need to raise rates at a future meeting if progress on inflation stalls or reverses. Her baseline outlook, however, is that the Fed will still lower rates this year.
Some other Fed officials did offer assurances in the last week, before the most recent inflation data, that their estimates had not changed.
The new inflation data on Wednesday also produced some political reactions, a sign of how the Fed’s decision on rates will most certainly collide with the presidential election this fall.
“Today’s report shows inflation has fallen more than 60% from its peak, but we have more to do to lower costs for hardworking families,” President Joe Biden said a statement Wednesday. “Prices are still too high for housing and groceries, even as prices for key household items like milk and eggs are lower than a year ago.”
Former President Donald Trump, who is running against Biden, wrote on Truth Social that “inflation is back — and raging.”
He also asserted that the Fed “will never be able to credibly lower interest rates, because they want to protect the worst President in the history of the United States.”
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