Higher-than-expected inflation has also fueled investor fears that the Federal Reserve will be forced to postpone the number and timing of rate cuts this year.
The consumer price index (CPI) rose 3.5% in March from a year earlier, accelerating from February's 3.2% annualized rise and beating economists' expectations.
The year-on-year change in the so-called “core” CPI, which excludes volatile food and energy prices, was 3.8%, the same level as February but a tenth of a percentage point higher than expected.
“There's no question that this is somewhat disappointing,” Greg Daco, chief economist at EY, told Yahoo Finance. “There is no denying that there is pressure to maintain this policy over time,” he added. policy stance. ”
Investors agree. The stock market fell in the wake of the CPI announcement, and the odds supporting the Fed's June rate cut evaporated, shattering the prevailing belief on Wall Street.
Traders who had bet on a rate cut in June now believe there is about an 85% chance the Fed will do nothing in June and about a 41% chance of a July cut.
The Fed also reduced the number of interest rate cuts this year to two, which is fewer than the median of three set by Fed officials at its last policy meeting in March.
The minutes of the meeting, released Wednesday, also noted that the rise in inflation at the beginning of the year should not be discounted as a “statistical aberration,” but “nearly all” participants agreed that sometime this year This indicated that they agreed that there would be a rate cut.
According to the minutes, “Participants generally noted uncertainty about the persistence of high inflation and were of the view that recent data did not increase confidence that inflation was sustainably falling to 2%.'' “I have made a statement.''
But Fed officials say the current rate-hike cycle has peaked and monetary policy remains responsive to the economic outlook, including the possibility of keeping rates high for an extended period if inflation declines modestly. They agreed that they were in an appropriate position.
They expect monthly inflation to be bumpy and uneven on the way to the 2% inflation target.
read more: Impact of Fed interest rate decisions on bank accounts, CDs, loans, and credit cards
Since the March meeting, some Fed officials have issued new warnings that the number of rate cuts expected in 2024 could be reduced if inflation remains high and the economy continues to accelerate. It's emitting.
Atlanta Fed President Rafael Bostic has reduced the number of interest rate cuts this year to just one, telling Yahoo Finance on Tuesday: “We can't even rule out the possibility that we'll have to postpone further rate cuts.”
Bostic also did not rule out a zero rate cut in 2024.
“It puts pressure on them.”
The Consumer Price Index (CPI) report for March shows that inflation has proven stronger than expected for the third consecutive month. Additionally, the month-on-month increase rate of CPI and core CPI in March was 0.4%, both higher than expected.
“If print volumes worsen below 0.2%, annual rates for 3- and 6-month maturities will rise close to 3% or more in the coming months, with year-over-year rates falling below 2.5% by April data. will be prevented from doing so,” Matthew Ruzzetti, chief U.S. economist at Deutsche Bank Securities, said in a research note.
Crossmark Global Investments' Victoria Fernandez told Yahoo Finance that the strong start to 2024 is “basically a consistent downtrend towards the Federal Reserve's desired 2% rate.” “It shows that we are not doing that,” he said.
“This puts pressure on us to keep interest rates high,” he added.
The report of rising inflation also follows Friday's strong labor data, in which the U.S. economy created more jobs than expected in March, while the unemployment rate fell and wage growth remained steady, with many It showed that the labor market was on a firmer footing than economists expected.
“The Federal Reserve is not as restrictive as you might think,” said Joe Davis, Vanguard's chief global economist.
“I'm confused as follows [to] Why rush to cut? Indicators released on the labor market and today's inflation report point to concerns about a race to cut soon. The embers of inflation still linger in many parts of the economy. ”
Other Fed officials are pouring cold water on short-term hopes for monetary easing.
“I think it's premature to think about cutting rates,” Dallas Fed President Laurie Logan said in a speech Friday. “We will need to see further uncertainty removed about what economic path we are on.”
Federal Reserve President Michelle Bowman also voiced concerns on Friday, even saying the Fed could have to raise rates at a future meeting if inflation progress stalls or reverses. But his basic outlook is that the Fed will cut rates again this year.
Several other Fed officials made it clear last week, before the latest inflation numbers were released, that their estimates remained unchanged.
They included Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daley, who both stuck to their forecasts for three rate cuts in 2024.
Wednesday's new inflation numbers also triggered a political reaction, indicating the Fed's interest rate decisions are certain to clash with this fall's presidential election.
“Today's report shows inflation is down more than 60% from its peak, but we need to do more to lower costs for hardworking families,” President Joe Biden said in a statement Wednesday. There’s more.” “Even though prices for key household goods like milk and eggs are lower than they were a year ago, housing and food prices remain too high.”
Biden's opponent, former President Donald Trump, wrote on Truth Social that “inflation is back and running rampant.”
He also argued that the Fed “will never be able to reliably lower interest rates because it wants to protect the worst president in American history.”
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