The latest inflation data represented a setback to hopes of an interest rate cut at the Federal Reserve’s June meeting.
Analysts at major banks changed their forecasts on the timing of interest rate cuts after the March consumer price index (CPI) report showed inflation accelerating to an annual rate of 3, 5%.
The positive CPI reading was driven by March cost increases for things including auto insurance and medical care. Meanwhile, housing price increases accounted for more than 60% of overall annual inflation.
The Fed uses interest rate increases as a means of slowing the economy to fight inflation, and is likely to lower rates only when inflation is under control. Previously, many on Wall Street had expected interest rate cuts of three-quarters of a point in 2024, and that was in line with Fed officials’ most recent projections released on March 20. Now, optimism is fading in terms of how soon the Fed will cut interest rates. be cut, as well as how many cuts there will be this year.
Interest rates have far-reaching effects on the economy. Americans are still grappling with some of the highest borrowing rates in years. Mortgage rates will likely rise above 7% following this inflation data update, according to the National Association of Realtors. (There are also silver linings in the current rate environment, such as better yields on certificates of deposit.)
Before rates can be cut, Fed officials are waiting for evidence that inflation is closer to the 2% target level. The big question right now is how long it will take to get there.
This week, economists at firms including Goldman Sachs, UBS and Bank of America revised their forecasts after the CPI was released: They no longer expect three rate cuts in 2024 and say the first cut probably won’t come until at least in July.
Will the Federal Reserve cut rates in June?
A rate cut in June seems much less likely than it did just a few days ago. However, the Fed could still decide to proceed with a rate cut in June if officials believe interest rates are too restrictive. Any data showing that inflation is slowing or that the labor market is cooling would support the case for a rate cut in June.
“We believe 3 interest rate cuts are plausible for 2024. Market prices are starting to reflect the risks of even 2 cuts this year, but right now 3 is our base case,” said Gargi Chaudhuri , head of BlackRock’s iShares investment strategy in America. in a note on Wednesday. However, he adds that it seems more likely that the planned cuts will begin after June.
Analysts expect further cuts throughout the year
The new market expectation calls for two rate cuts in 2024, with the first by September, according to the CME’s FedWatch tool.
Rohan Reddy, director of research at Global
“This is now the third consecutive month that the consumer price index has exceeded expectations, so this will give the Fed more reason to further delay rate cuts,” Reddy says.
Economists at Bank of America, who upgraded their forecasts Thursday to call for just one rate this year (in December), said the inflation data will make Fed officials worry about the risks of cutting too soon.
“We think the Fed will have difficulty reaching a consensus to cut rates in June. It was a close call initially, with the committee expecting about 50/50 between three or more cuts this year versus fewer by three at the time of decision. March meeting. So let’s take the June rate cut off the table,” analysts said in a note. “We believe this logic also rules out cuts starting in July or September. By then we simply do not see sufficient progress on inflation and its components.”
Goldman Sachs expects two rate cuts in 2024 starting in July, while UBS expects the same number but starting in September.
Is another rate hike possible?
In recent weeks, most of the debate around the Fed has been around when it will cut rates. But the latest inflation reading reminded us that cuts are not guaranteed this year, and it’s always possible there could be another rate hike if economic conditions change.
“With high unemployment and rising commodity prices, the Fed’s next move could well be to raise rates to tame prices and keep inflation in check,” Skyler Weinand, chief investment officer, said in a note by Regan Capital.
Joe Davis, chief global economist at Vanguard, echoed concerns that there is too much focus on cuts. “I was confused as to why there was such a rush to cut,” he said in a statement. “There are still embers of inflation here and there in the economy.”
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