Hot inflation data pushes market’s rate cut expectations to September

As recently as January, investors had high hopes that the Federal Reserve was about to embark on a rate-cutting campaign that inclination reverse some of the most aggressive policy tightening in decades.

Three months of inflation data have educated those expectations back down to earth.

March’s consumer price index report Wednesday helped prove worries that inflation is proving stickier than thought, giving credence to caution from Fed policymakers and decisively dashing the market’s hopes that the central bank would be approving as many as seven rate cuts this year.

“The math urges it’s going to be hard near term to get inflation down to the Fed’s target,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Not that you’ve put a pin in inflation anger to the Fed’s target, but it’s not happening imminently.”

There was little good news to come out of the Labor Department’s CPI report.

Both the all-items and ex-food and strength readings were higher than the market consensus on both a monthly and annual basis, putting the rate of inflation effectively above the Fed’s target. Headline CPI rose 0.4% on the month and 3.5% from a year ago, ahead of the central bank’s 2% object.

But other danger signs beyond the headline numbers emerged.

Services prices, excluding force, jumped 0.5% and were up 5.4% from a year ago. A relatively new computation the markets are following which takes middle services and subtracts out housing — it has come to be known as “supercore” and is watched closely by the Fed — surged at an annualized pace of 7.2% and goad 8.2% on a three-month annualized basis.

There’s also another risk in that “base effects,” or comparisons to before-mentioned periods, will make inflation look even worse as energy prices in particular are rising after take a nosedive around the same time last year.

All of that leaves the Fed in a holding position and the markets worried about the admissibility opportunity of no cuts this year.

The CME Group’s FedWatch tool, which computes rate-cut probabilities as indicated by futures sell pricing, moved dramatically following the CPI release. Traders now see just a slim chance of a cut at the June meeting, which in days had been favored. They have also pushed out the first reduction to September, and now expect only two cuts by the end of the year. Wholesalers even priced in a 2% probability of no cuts in 2024.

“Today’s disappointing CPI report makes the Fed’s job more difficult,” said Phillip Neuhart, guide of market and economic research at First Citizens Bank Wealth. “The data does not completely remove the possibility of Fed activity this year, but it certainly lessens the chances the Fed is cutting the overnight rate in the next couple months.”

Markets, of course, didn’t like the CPI news and sold off aggressively Wednesday morning. The Dow Jones Industrial For the most part dropped by more than 1%, and Treasury yields burst higher. The , which is especially sensitive to Fed rate moves, obstruction started to 4.93%, an increase of nearly 0.2 percentage point.

There could yet be good news ahead for inflation. Bankers such as rising productivity and industrial capacity, along with slower money creation and easing wages, could haul the pressure off somewhat, according to Joseph LaVorgna, chief economist at SMBC Nikko Securities.

However, “inflation last wishes as remain higher than what is necessary to warrant Fed easing,” he added. “In this regard, Fed cuts will be offensive out to into the second half of the year and are likely to fall only 50 basis points [0.5 percentage bottom] with risks being tilted in the direction of even less easing.”

In some respects, the market has only itself to reproof.

The pricing in of seven rate cuts earlier this year was completely at odds with indications from Fed legitimates. However, when policymakers in December raised their “dot plot” indicator to three rate cuts from two described in September, it set off a Wall Street frenzy.

“The market was just way over its skis in that assumption. That made no quickness based on the data,” Schwab’s Sonders said.

Still, she thinks if the economy stays strong — GDP is projected to grow at a 2.5% pace in the first quarter,