Inflation rose in February, which could give Federal Reserve officials more reason to be cautious as they think about potentially easing interest rates.
The Federal Reserve’s rate-setting committee is in the spotlight, given expectations for an interest rate cut in the coming months. Lower rates could boost key sectors of the economy, such as the housing market, currently in crisis due to high mortgage rates.
Analysts say inflation has made a dramatic descent from a June 2022 peak of above 9% to the current annual rate of 3.2%, according to the latest Consumer Price Index (CPI) report. But February’s increase from last month’s inflation rate of 3.1% is a reminder that reaching the Fed’s goal of 2% inflation could take time, according to Skyler Weinand, chief investment officer at Regan Capital in Dallas.
“With inflation slightly higher than expected, we think it’s a toss-up whether the Fed cuts interest rates in June or takes a more conservative approach and waits until September. The last mile to price stability is proving to be the most difficult,” Weinand said in a statement.
When will the Fed cut interest rates?
Last week, Federal Reserve Chair Jerome Powell said during congressional testimony that “it will probably be appropriate to begin reducing policy restrictions at some point this year” on the assumption that “the economy is performing broadly as expected.” ”. However, higher-than-expected inflation could delay rate cuts, perhaps even into next year, in a worst-case scenario.
If inflation declines in the coming months, the Fed will likely look to cut rates. Economists at Bank of America agree with the prevailing expectation among investors for interest rate cuts starting in June, noting that the easing of services inflation in the February CPI report is a positive development.
Lydia Boussour, senior economist at consultancy EY-Parthenon, believes that “Fed officials will likely put this inflation report in the ‘not so good’ column.” However, EY expects multiple rate cuts by the end of the year.
“While the ride may prove bumpy, we expect inflation to continue falling in the coming months,” Boussou said in an analysis of the CPI report. “Therefore, we expect the Fed’s policy easing cycle to begin in June.”
Beyond the headline inflation reading, there are some positives to the inflation report from an investment perspective, experts said. The monthly increase in owner equivalent rent (OER), which tracks property inflation for landlords, fell to 0.4% from 0.6% in January. (January’s high OER raised concerns among analysts.)
Additionally, some of the CPI inflation for the month of February can be attributed to rising gas prices, which are not of great importance to the Fed. The Bureau of Labor Statistics noted that housing and gas combined caused more than 60 % CPI inflation of 0.4% February. Other categories that contributed to the month’s inflation were airline tickets, auto insurance, clothing and recreational activities.
Overall, Jeffrey Roach, chief economist at LPL Financial, said it was unclear whether the inflation report would be viewed as positive or negative. “Expect to see markets grapple with what this means for Fed policy,” Roach said. Stocks rose Tuesday with the S&P 500 index up about 1% by mid-afternoon.
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