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Traders cut bets on Federal Reserve interest rate cuts on Wednesday after U.S. inflation beat expectations and Joe Biden acknowledged there was “more to do” to combat rising prices.
Bond yields rose, stocks fell and markets revised their forecasts for summer rate cuts after official data showed a 3.5% rise in consumer prices for the year to March.
“Today’s report shows that inflation has fallen more than 60% from its peak, but we must do more to reduce costs for hard-working families,” the US president said after the release of the data.
Wednesday’s figure compares with forecasts of a 3.4% rise. Core inflation also exceeded expectations due to pricing pressures in service sectors such as healthcare and auto insurance.
“You have to take seriously the possibility that the next move in rates will be up rather than down,” said former Treasury Secretary Larry Summers, demonstrating the effect of inflation data on rate expectations.
Speaking to Bloomberg, he added that a rate cut in June “would be a dangerous and egregious mistake.”
The data is the latest to show the US economy is hotter than expected, a potential problem for Biden as he tries to overcome Donald Trump’s lead in polls ahead of this year’s election.
Before today’s data, higher-than-expected data from January and February had already sparked concerns among rate makers that inflation would prove too sticky for them to cut rates sooner than expected.
While officials still believe they are essentially on track to reach the 2% target, the Federal Open Market Committee’s March vote minutes, released Wednesday afternoon, showed factors ranging from rising oil prices and real estate costs as financial conditions ease, put upwards. risks for that base case.
Tariff makers also expressed concern that high price pressures “continue to harm families, especially those least able to cope with the higher costs of basic necessities such as food, housing and transport”.
Markets are now betting that rate cuts may not begin until the Fed meets soon after the Nov. 5 vote.
Futures traders lowered their rate cut expectations to price in between one and two quarter-point cuts this year, down from at least six cuts in early January.
Immediately before Wednesday’s data release, markets had been forecasting between two and three cuts this year.
Traders had also previously viewed a July cut as almost certain, but halved their bets on that timing from about 98% to 50% after Wednesday’s report was released.
Although markets still give a very high probability of rate cuts by September, they have not fully priced in a cut until the Fed meeting on November 6-7.
The two-year Treasury yield, which moves with interest rate expectations, jumped sharply to 4.97% in late afternoon trading, just off the previous four-month peak of 4.98%.
The S&P 500 index closed down nearly 1%, with about nine out of 10 stocks losing ground.
“Although the Fed’s policy shift towards cutting interest rates is still on the table for 2024, recent data have significantly complicated the task of finding the right moment for a move that avoids limiting growth and at the same time does not prematurely declare victory against inflation,” said Eswar Prasad, an economics professor at Cornell University.
The CPI had previously risen to 3.2% in February from 3.1% in January and last week’s bumper jobs data led markets to further curb expectations of Fed rate cuts.
In his response to the data on Wednesday, Biden called on companies, particularly food retailers, “to use record profits to reduce prices.” He also attacked congressional Republicans, who he accused of “helping special interests and Big Pharma raise prices.”
The U.S. president said at a news conference later Wednesday that he still believes the Fed will cut rates this year, but said previously released inflation data could push the timing back a month or two beyond the his initial expectations.
The Bureau of Labor Statistics said core inflation, which excludes changes in food and energy costs, remained at 3.8%, the same rate as February. Economists had expected a March core rate of 3.7%.
The Fed’s “dot plot” forecast shows that rate makers, starting in March, are expected to make three cuts this year from the benchmark rate’s current 23-year high of 5.25% to 5.5% .
However, recent remarks from regional Fed presidents have cast doubt on those projections.
While Fed Chair Jay Powell still believes in a “base case” that shows inflation falling toward the central bank’s 2% target, other FOMC members are increasingly concerned that price pressures will prove more persistent expected.
Chicago Fed President Austan Goolsbee expressed concern that housing inflation will remain too strong, while Dallas Fed chief Lorie Logan warned of greater “upside risk” to stocks. perspectives.
While neither Goolsbee nor Logan have a vote on the FOMC, Atlanta Fed President Raphael Bostic does, and he has consistently warned that the central bank may struggle to cut more than once this year.
Additional reporting by Demetri Sevastopulo in Washington