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High inflation data expected to delay interest rate cut
WASHINGTON, DC – U.S. Federal Reserve Chairman Jerome Powell answers questions from reporters … [+]
The lack of improvement in inflation data in the first quarter of 2024 is expected to delay a possible first interest rate cut from the Federal Open Market Committee until at least July and possibly later . Monthly Consumer Price Index data for January, February and March indicated that the path to reaching the FOMC's 2% annual inflation target will not be straightforward.
Indeed, the overall CPI has increased on an annual basis since January 2024, according to the two most recent publications. Disinflation persists, once food and energy prices are excluded, but perhaps at a slower pace. For March 2024, overall annual CPI inflation stands at 3.5%, excluding food and energy, it stands at 3.8%. Recent inflation data may not be good enough for the FOMC to cut short-term interest rates.
Upcoming FOMC Meetings
Bond markets see virtually no chance that the FOMC will cut rates at its next meeting in May, according to the CME FedWatch Tool. There is currently about a 1 in 4 chance that a decline will be seen in June, but this figure is considerably lower than before the March CPI data was released.
Markets now expect the first cut to most likely come in July or later, with an emerging, but low, chance that the Fed will not cut interest rates at all in 2024. The FOMC has been raising interest rates for the last time in July 2023, so the highest interest rates could ultimately last for 12 months or more. This would be unusual in a historical context, since the FOMC has historically acted quickly to cut rates after their last hike, but this business cycle has been unusual in many ways.
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Fed officials projected on March 20 that two or three interest rate cuts could occur in 2024 according to the Summary of Economic Projections. However, this was before the CPI was released in March, making it a somewhat outdated forecast.
Yet FOMC policymakers have repeatedly stated that they believe we are likely at peak interest rates right now. Economic projections from FOMC policymakers will be updated on June 12.
Jobs data
Employment data is also important. However, the most recent report on the employment situation for the month of March suggests a relatively healthy U.S. labor market. Fears of an economic slowdown, as might be implied by a weaker labor market, could encourage the FOMC to cut rates. This is due to the FOMC's dual mandate: controlling inflation and supporting employment. For now, the FOMC has been able to be patient and keep rates relatively high while monitoring inflation data, looking for sustained improvement. If the employment data were to weaken significantly, the FOMC would face a dilemma: balancing the desire to control inflation with the promotion of strong employment.
What to expect
For now, there is concern that even though the more extreme wave of inflation is over, core inflation remains significantly above the Fed's 2% target. With the labor market remaining relatively strong, the Fed has time to wait and see how the inflation data develops.
For 2024, signs of further disinflation are so far rare, which will likely push back any interest rate cuts relative to prior expectations. The FOMC is still expected to cut rates in 2024, but the cuts may be fewer and later than expected.
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Sources 2/ https://www.forbes.com/sites/simonmoore/2024/04/13/elevated-inflation-data-expected-to-delay-interest-rate-cuts/ The mention sources can contact us to remove/changing this article |
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