Hot inflation data pushes market’s rate cut expectations to September

As
recently
as
January,
investors
had
high
hopes
that
the

Federal
Reserve
was
about
to
embark
on
a
rate-cutting
campaign
that
would
reverse
some
of
the
most
aggressive
policy
tightening
in
decades.

Three
months
of

inflation
data
have
brought
those
expectations
back
down
to
earth.

March’s

consumer
price
index
report
Wednesday
helped
verify
worries
that
inflation
is
proving
stickier
than
thought,
giving
credence
to
caution
from
Fed
policymakers
and
finally
dashing
the
market’s
hopes
that
the
central
bank
would
be
approving
as
many
as
seven
rate
cuts
this
year.

“The
math
suggests
it’s
going
to
be
hard
near
term
to
get
inflation
down
to
the
Fed’s
target,”
said
Liz
Ann
Sonders,
chief
investment
strategist
at
Charles
Schwab. “Not
that
you’ve
put
a
pin
in
inflation
getting
to
the
Fed’s
target,
but
it’s
not
happening
imminently.”

There
was
little
good
news
to
come
out
of
the
Labor
Department’s

CPI
report.

Both
the
all-items
and
ex-food
and
energy
readings
were
higher
than
the
market
consensus
on
both
a
monthly
and
annual
basis,
putting
the
rate
of
inflation
well
above
the
Fed’s
target.
Headline
CPI
rose
0.4%
on
the
month
and
3.5%
from
a
year
ago,
ahead
of
the
central
bank’s
2%
goal.

But
other
danger
signs
beyond
the
headline
numbers
emerged.

Services
prices,
excluding
energy,
jumped
0.5%
and
were
up
5.4%
from
a
year
ago.
A
relatively
new
computation
the
markets
are
following
which
takes
core
services
and
subtracts
out
housing
—
it
has
come
to
be
known
as “supercore”
and
is
watched
closely
by
the
Fed
—
surged
at
an
annualized
pace
of
7.2%
and
rose
8.2%
on
a
three-month
annualized
basis.

There’s
also
another
risk
in
that “base
effects,”
or
comparisons
to
previous
periods,
will
make
inflation
look
even
worse
as
energy
prices
in
particular
are
rising
after
falling
around
the
same
time
last
year.

All
of
that
leaves
the
Fed
in
a
holding
position
and
the
markets
worried
about
the
possibility
of
no
cuts
this
year.

The
CME
Group’s

FedWatch
tool,
which
computes
rate-cut
probabilities
as
indicated
by
futures
market
pricing,
moved
dramatically
following
the
CPI
release.
Traders
now
see
just
a
slim
chance
of
a
cut
at
the
June
meeting,
which
previously
had
been
favored.
They
have
also
pushed
out
the
first
reduction
to
September,
and
now
expect
only
two
cuts
by
the
end
of
the
year.
Traders
even
priced
in
a
2%
probability
of
no
cuts
in
2024.

“Today’s
disappointing
CPI
report
makes
the
Fed’s
job
more
difficult,”
said
Phillip
Neuhart,
director
of
market
and
economic
research
at
First
Citizens
Bank
Wealth. “The
data
does
not
completely
remove
the
possibility
of
Fed
action
this
year,
but
it
certainly
lessens
the
chances
the
Fed
is
cutting
the
overnight
rate
in
the
next
couple
months.”

Markets,
of
course,
didn’t
like
the
CPI
news
and

sold
off
aggressively
Wednesday
morning.
The


Dow
Jones
Industrial
Average
dropped
by
more
than
1%,
and
Treasury
yields
burst
higher.
The


2-year
Treasury
note,
which
is
especially
sensitive
to
Fed
rate
moves,
jumped
to
4.93%,
an
increase
of
nearly
0.2
percentage
point.

There
could
yet
be
good
news
ahead
for
inflation.
Factors
such
as
rising
productivity
and
industrial
capacity,
along
with
slower
money
creation
and
easing
wages,
could
take
the
pressure
off
somewhat,
according
to
Joseph
LaVorgna,
chief
economist
at
SMBC
Nikko
Securities.

However, “inflation
will
remain
higher
than
what
is
necessary
to
warrant
Fed
easing,”
he
added. “In
this
regard,
Fed
cuts
will
be
pushed
out
to
into
the
second
half
of
the
year
and
are
likely
to
fall
only
50
basis
points
[0.5
percentage
point]
with
risks
being
tilted
in
the
direction
of
even
less
easing.”

In
some
respects,
the
market
has
only
itself
to
blame.

The
pricing
in
of
seven
rate
cuts
earlier
this
year
was
completely
at
odds
with
indications
from
Fed
officials.
However,
when
policymakers
in
December
raised
their “dot
plot”
indicator
to
three
rate
cuts
from
two
projected
in
September,
it
set
off
a
Wall
Street
frenzy.

“The
market
was
just
way
over
its
skis
in
that
assumption.
That
made
no
sense
based
on
the
data,”
Schwab’s
Sonders
said.

Still,
she
thinks
if
the
economy
stays
strong
—
GDP
is
projected
to
grow
at
a
2.5%
rate
in
the
first
quarter,

according
to
the
Atlanta
Fed
—
the
knee-jerk
reaction
to
Wednesday’s
data
could
pass.

“If
the
economy
hangs
in
there,
I
think
the
market
is,
for
the
most
part,
OK,”
Sonders
said.

Correction:
The
markets
are
worried
about
the
possibility
of
no
cuts
this
year.
An
earlier
version
misstated
the
worries.