Following the US Consumer Price Index coming in stronger than expected for March, economists are sharing their thoughts. The general consensus? Don’t expect interest rates to be cut anytime soon.
“Today’s key CPI release has likely sealed the fate of the June FOMC meeting, with a rate cut highly unlikely,” Seema Shah, chief global strategist at Principal Asset Management, said following the release. “This is the third consecutive strong reading, meaning the stagnant disinflation narrative can no longer be considered temporary.”
“Indeed, if inflation does moderate next month, even to more comfortable levels, there will be enough caution within the Fed that a July rate cut is too much of a stretch, at which point the US presidential election will start to influence the Fed’s decision-making,” Shah added.
Investors now expect two 25-basis-point rate cuts this year, down from six cuts expected at the start of the year, according to Bloomberg data.
The consumer price index (CPI) rose 0.4% from the previous month and 3.5% from a year earlier in March, accelerating from February’s 3.2% year-on-year increase and beating economists’ expectations.
On a “core” basis, which strips out volatile food and gasoline prices, prices rose 0.4% in March from the previous month and 3.8% from a year earlier, in line with February data, and both figures beat economists’ expectations.
Stronger data could lead more policymakers to join “the two cutter camps,” said Ryan Sweet, chief U.S. economist at Oxford Economics.
“The Fed is leaning toward cutting rates this year, but the strength of the labor market and the recent rise in inflation give the Fed some room to be patient,” Sweet said. “If the Fed does not cut rates in June, the window for a rate cut could close until September, as little data is released between the June and July meetings that would change the Fed’s calculations.”
“It’s becoming increasingly likely that the Fed will cut rates by less than 75 basis points this year,” he predicted.
But EY chief economist Greg Daco warned investors to be patient, saying: “I think we have to be very cautious about thinking that this is a piece-by-piece process.”
“These indicators still suggest deflationary pressures,” he said in an interview with Yahoo Finance. “We’re still moving in the right direction, but it will take time.”
After the data was released, markets were pricing in an 80% chance that the Fed will keep rates steady at its June meeting, up from about 40% the day before, according to data from the CME FedWatch tool.
More than half of investors expect the central bank to keep interest rates on hold until its July meeting, with the first rate cut widely expected in September.
Please see here for the detail.