June rate cut slowly fading away: Is the Fed really going to cut rates this year?
Geopolitical tensions in the Middle East and hot CPI print for March is a setback for the Federal Reserve and make a June rate cut unlikely. Additionally, several FED policymakers including Chair Powell have been advocating that the central bank needs more confidence in inflation and is not in a rush to cut the rates. The Fed’s next rate decision will take place at the beginning of May and the central bank is expected to hold rates steady, while the focus shifts to the Fed’s forecasts and commentary.
Fed Chair Powell signals cautious approach to rate cuts
After months full of stronger-than-expected data, Fed Chair Jerome Powell shifted his tone on rate cuts. “Reducing rates too soon or too much could result in a reversal in the progress we’ve seen on inflation and ultimately require even tighter policy to get inflation back to 2%,” — Powell said last week. “Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy,” Powell added.
The market participants and investors currently expect the US central bank to only start reducing rates in September, with the probability of a June cut at just 14%, according to CME’s FedWatch tool. Interesting fact: nearly 15% has been positioned for no rate cuts at all this year. Initially, the market had predicted six rate cuts totalling 1.5 percentage points starting in March. At the same time, The ECB has a target of 2% inflation and things seem to be moving in this direction. The current mood indicates that the ECB or BOE will become the first central bank to cut rates before the FED.
June rate cut bets slashed after hot CPI and retail sales
US consumer price increases accelerated to 3.5 per cent annually in March and core US inflation — which excludes the volatile food and energy categories — was a higher-than-expected 3.8 per cent. Inflation was hotter than expected in March, a trend we’ve seen in recent months, as rising energy & shelter costs added to pricing pressure. These stubbornly high inflation readings could delay the Fed’s timing for rate cuts this year. Recent surges in retail sales also hint at a potential scaling back of rate reductions by the Fed. In March, US retail sales unexpectedly climbed by 0.7%, surpassing the forecasted 0.3% growth. The surprise increase in retail sales showcases sustained consumer confidence.
Core PCE is the next focus as rate-cut hopes fade
Since a June cut is now firmly off the table. We’ll likely have to wait for the second half of the year for the Fed to start cutting, but the issue isn’t so much whether the bank will cut rates this year.
A slew of economic news this week will make it much clearer if the Federal Reserve will cut interest rates in June. It is also important to remember that the Fed does not target the CPI but uses the PCE deflator instead. Fed Chair Jerome Powell and other policymakers often highlight core PCE inflation as it’s generally considered a better signal of where inflation is headed. On Friday, the Department of Commerce will publish its price deflators for personal consumption expenditures covering the month of March.
