Fed rate cut unlikely till September as inflation remains high

Fed rate cut: The Federal Reserve is expected to announce a quarter-point interest rate cut at its September meeting, as the latest US inflation report continues to show high levels of price pressures throughout the economy. 

This decision comes after months of speculation that a rate cut would occur in June, but with the release of a third consecutive stronger-than-expected consumer inflation reading, traders are now anticipating a mid-September reduction.

The possibility of no rate cuts this year has also increased, with the chance of no cuts rising from less than 1 per cent a week ago to about 14 per cent after Wednesday's inflation surprise. While this scenario is still considered unlikely, it is being discussed by economists and some Fed officials. 

The Fed's March meeting minutes, released on Wednesday, revealed that policymakers were already concerned about inflation before the latest report. At that time, most Fed officials still believed that three rate cuts this year would be appropriate, but there was growing support for fewer cuts. Atlanta Fed President Raphael Bostic, for example, stated that he only sees one rate cut this year, in the fourth quarter.

"Given the strength and resilience of the US economy, I cannot rule out the possibility that rate cuts may have to be pushed back even further," Bostic said in an interview with Yahoo Finance on Tuesday.

The US Department of Labour's report on Wednesday showed that the consumer price index rose 3.5 per cent year-on-year in March, an increase from the 3.2 per cent rise in February. Core consumer price inflation, which excludes food and gas prices and is used by economists to gauge the stickiness of prices, also rose 3.8 per cent year-on-year, the same pace as in February. 

"This report is unlikely to boost the confidence of Fed officials," said Omair Sharif of Inflation Insights. "If they were disappointed with the inflation readings in January and February, they will be even more discouraged after today's report." 

US President Joe Biden, who will face former president Donald Trump in the November presidential election, acknowledged on Wednesday that the persistent inflation will likely delay the Fed's plans to cut rates, although he still believes that borrowing costs will decrease this year. 

The yield on the 10-year Treasury note reached 4.5 per cent after the inflation report on Wednesday, its highest level since November of last year. The two and 10-year yields had their largest daily gains since March 2023 and September 2022, respectively. 

Fed officials, including influential Fed Governor Christopher Waller, have stated that they need more data to determine whether the higher-than-expected inflation readings in January and February were just temporary bumps on the road to the Fed's 2 per cent inflation target. 

Traders are now betting that the Fed will announce a quarter-point interest rate cut at its September 17-18 meeting, bringing the policy rate target to a range of 5 per cent-5.25 per cent, and they only expect one more rate cut by the end of the year. Just three months ago, when inflation appeared to be declining much faster than expected, the Fed was expected to cut rates a total of five times this year. 

"The lack of moderation in inflation will undermine the Fed's confidence that inflation is on a sustainable path towards 2 per cent and will likely delay rate cuts until at least September, and could even push them into next year," wrote Nationwide Chief Economist Kathy Bostjancic after the CPI report.

(With Reuters inputs.)