Some of Wall Street’s most pessimistic economists have been warning for years that the “last mile” in the Federal Reserve’s battle against inflation would be the most difficult. Mohamed El-Erian, chief economic advisor at Allianz and president of Queens’ College Cambridge, argued as early as the autumn of 2022 that inflation had become “entrenched” in the economy, meaning that, even with higher rates, it would probably get stuck between 3% and 4%.
For a time, that theory seemed to lack credibility. After reaching a 40-year high of 9.1% in June 2022, inflation gradually declined over the next year as the Fed raised interest rates, reaching a low of 3% in June 2023. But since then , inflation remained trapped in the 3% level. to 4%, just as El-Erian predicted: a range too far from the Fed’s target for them to consider a rate cut to revive the economy and markets. And now, after two hotter-than-expected inflation reports earlier in the year, Fed officials just got more bad news.
Inflation, as measured by the consumer price index (CPI), rose 3.5% from a year ago in March, the Bureau of Labor Statistics reported Wednesday. The figure beat economists’ consensus forecasts for inflation of 3.4% year-over-year and February’s reading of 3.2%.
“Disinflation is out and inflation is in with today’s CPI report,” said Karen Manna, portfolio manager at Federated Hermes. Fortune some data.
Rising energy and housing costs were the main drivers of the jump in overall inflation in March. Energy prices rose 1.1% last month alone due to recent increases in oil and gasoline prices, and shelter prices increased 5.7% from a year ago.
Core inflation, which excludes more volatile food and energy prices, also rose 0.4% month-on-month and 3.8% from a year ago in March, compared to consensus forecasts of 3, 7%. It was the third consecutive month in which core inflation rose more than 0.4%. Rising costs of auto insurance, car maintenance and medical services were largely responsible for the move.
“For the Fed, these data must be concerning,” Thomas Simons, senior economist at Jefferies, wrote in a note Wednesday.
“Let’s say goodbye to the June interest rate cut”
Fed Chair Jerome Powell and co have kept interest rates stable since July 2023, hoping inflation would return to the 2% target without the need for further rate hikes that would slow the economy. For a time, that policy seemed to work, and Wall Street began forecasting interest rate cuts as early as June. But now, “short of a sharp turnaround in economic data, particularly inflation data, it’s hard to see how the Fed could justify a rate cut as early as June,” Jefferies’ Simons said. And he wasn’t the only one to have this opinion after the excellent consumer price index report in March.
“You can kiss the June interest rate cut goodbye,” said Greg McBride, chief financial analyst at Bankrate Fortune in the comments sent via email. “Inflation has been higher than expected, the lack of progress towards 2% is now a trend.”
Rick Rieder, BlackRock’s global fixed income CIO and head of BlackRock’s global allocative investing team, said the latest inflation report made him “reconsider” some of his views on the Fed’s battle against inflation, arguing that “progress appears to have slowed”. setback.”
“The Fed can afford to be patient in bringing interest rates down from restrictive levels. We believe today’s report should delay the Fed’s planned policy rate cut this summer, and it is likely that cuts will be postponed until the end of the year or beyond,” he wrote in emailed comments to Fortune.
The change of heart on Wall Street follows predictions from several Fed officials for fewer interest rate cuts than previously expected in recent weeks. Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee (FOMC) that implements monetary policy, said in late March that he expects only one rate cut this year, arguing that the economy has been more “resilient” than expected. “I’ve kind of recalibrated when I think it’s appropriate to move,” he said. Federal Reserve Governor Christopher Waller also called the recent March inflation data “disappointing,” and argued that it meant there should be “no rush” to cut rates.
Rising inflation and higher-than-expected interest rates are not good news for consumers, whose real average hourly earnings did not rise at all in March, and have increased just 0.6% over the past 12 months. And it’s a similar story for investors. Markets reacted as expected to Wednesday’s inflation report, with all three major U.S. indexes falling by more than 1%. With fewer interest rate cuts on the horizon, John Lynch, chief investment officer at Comerica Wealth Management, warned that stocks could come under pressure unless earnings rise.
“Stock indexes are increasingly dependent on the next earnings season, as companies must deliver on commitments to support higher valuations. Any profit disappointment likely leads to the possibility of a short-term correction in the range of 5-6% for the S&P 500 index,” he said Fortune Via e-mail.
For investors, Gargi Chaudhuri, iShares’ head of investment strategy for the Americas, argued that the latest CPI report means it’s time to be cautious and invest only in the strongest companies.
“Against an environment of high inflation and resilient U.S. growth, we believe investors should remain focused on quality companies with strong earnings and margin resilience,” he wrote in emailed comments to Fortune.