After US inflation exceeded expectations, traders slashed their bets on Federal Reserve rate cuts Wednesday. Joe Biden also acknowledged that there was still “more to be done” in combating price increases.
After official data revealed a 3.5% increase in consumer price for the period ending March, bond yields increased, stocks fell and markets revised their estimates of rate reductions this summer.
After the release of the data, the US President said: “Today’s reports shows that inflation has dropped more than 60% from its peak. But we still have work to do in order to reduce costs for hardworking families.”
The figure for Wednesday was higher than the forecast of 3,4%. The core inflation rate also exceeded expectations, due to the price pressures experienced in sectors like healthcare and auto insurance.
Former Treasury Secretary Larry Summers stated that “you have to take the possibility seriously that the next rate movement will be upwards instead of downwards”, as a sign of how inflation statistics can affect rate expectations.
He told Bloomberg that a June rate cut “would be an egregious and dangerous error”.
These figures show that the US Economy is running hotter than expected. This could be a problem for Biden, who wants to overtake Donald Trump’s lead in the polls ahead of the election this year.
Before today’s release, the hotter than expected releases in January and Febrary had already caused concern among rate-setters about inflation being too sticky for them to be able to reduce rates as quickly as they had anticipated.
The minutes of the Federal Open Market Committee’s March vote published on Wednesday showed that factors such as higher oil and housing costs, or looser financial conditions could have an impact on the base case.
The rate-setters expressed concern about the rising costs of food, housing, and transportation, which “continue to harm households”.
The markets are betting that the Fed may delay any rate cuts until after the 5th of November.
Futures traders have reduced their expectations for rate cuts to between one and two quarter points this year, down from six at the beginning of January.
Before the release of Wednesday’s figures, the markets expected between two and three reductions this year.
After the release of Wednesday’s report, traders who had previously believed that a cut in July was a near certainty have now halved those bets.
The markets are still predicting a rate cut by September. However, the Fed meeting on November 6 and 7 is when they will fully price in the reduction.
The yield on the two-year Treasury, which is influenced by interest rate expectations, increased 0.23 percentage points, to reach 4.97 percent, its highest level for more than four months.
After the Fed minutes were released, the S&P 500 fell by 1.1 percent in the afternoon.
Eswar Prasad is an economics professor at Cornell University. He said that recent data has made it difficult to determine the best time for the Fed to make a policy pivot towards cutting interest rates. This would not only avoid limiting growth, but also prevent prematurely declaring victory over inflation.
CPI was previously up to 3.2% in February, from 3.1 percent in January. And job figures released last week were so impressive that they led to markets reducing their expectations for Fed rate cuts.
In response to the figures released on Wednesday, Biden urged corporations, including food retailers, to “use record profits to lower prices”. He also criticized Congressional Republicans for “helping special interest groups and Big Pharma increase prices”.
At a later news conference on Wednesday, the US president said that he believed the Fed will cut rates this coming year. However, he added that the inflation data earlier released could delay the timing of the rate cuts by a few months.
Bureau of Labor Statistics reported that core inflation – which excludes food and energy prices – remained unchanged at 3.8%, the same as in February. Economists expected that the core rate would be 3.7 percent for March.
As of March, the Fed’s ” dot graph ” forecasts showed that rate-setters expected to make at least three cuts to the benchmark rate this year, which is currently 5.25 to 5.5 percent, a 23-year-high.
Recent remarks by regional Fed presidents cast doubt on these projections.
While Fed Chair Jay Powell continues to believe in a “basecase” which shows that inflation will continue to fall towards the 2 percent goal of the central bank, other members of the FOMC have become increasingly concerned that the price pressures may be more than expected.
Chicago Fed President Austan Goolsbee expressed concerns that housing inflation would remain too high, while Dallas Fed chief Lorie Logan warned of increased “upside risks” in the outlook.
While neither Goolsbee or Logan have a vote in the FOMC meeting, Atlanta Fed President Raphael Bostic has. He has repeatedly warned that it may be difficult for the central bank to reduce rates more than once this year.
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