Traders slashed bets on imminent Federal Reserve rate cuts on Wednesday after data showed US inflation rose to 3.5 per cent in March, surpassing expectations and marking the second increase in a row.
The annual consumer price index figure compared with expectations of a 3.4 per cent rise, according to economists polled by Bloomberg, while the core number was also greater than forecast.
CPI had risen to 3.2 per cent in February from 3.1 per cent in January.
Bond yields jumped and stocks slid after the data release, as US President Joe Biden acknowledged there was “more to do” on fighting inflation.
Markets are now betting that interest rate cuts may not begin until November, at a Fed meeting scheduled just after the US presidential election.
Futures traders lowered their rate cut expectations to priced in between one and two quarter-point cuts this year.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
Before the inflation figures were published, markets had expected between two and three cuts this year. Early In January, they had expected at least six cuts.
Traders had also previously seen a July cut as a near-certainty, but halved their bets on that timing from around 98 per cent to 50 per cent after Wednesday’s report was released.
While the markets still give a very high probability to rate cuts by September, they have not fully priced in a cut until the Fed’s November 6-7 meeting.
The two-year Treasury yield, which moves with interest rate expectations, jumped by about 0.23 percentage points to almost 4.98 per cent, its highest level in more than four months.
The S&P 500 was down 1 per cent in late-morning trade.
“Even if the Fed’s policy pivot toward cutting interest rates is still on the table for 2024, recent data have greatly complicated the task of finding the right time for a move that avoids constraining growth while also not prematurely declaring victory against inflation,” said Eswar Prasad, economics professor at Cornell University.
The higher than expected inflation numbers are a blow to Biden, who is struggling to convince voters of his economic record as he ramps up his campaign for the November 5 election.
Bumper jobs figures last week had already led markets to further rein in expectations of Fed rate cuts.
But while Biden has touted the strength of the labour market, cumulative price increases during his first term have hit consumers’ purchasing power.
“Today’s report shows inflation has fallen more than 60 per cent from its peak, but we have more to do to lower costs for hard-working families,” the US president said on Wednesday.
Biden called on corporations, notably food retailers, “to use record profits to reduce prices”. He also attacked Congressional Republicans, whom he accused of “helping special interests and Big Pharma raise prices”.
The Bureau of Labor Statistics added on Wednesday that core inflation, which excludes changes in food and energy costs, remained at 3.8 per cent, the same rate as February. Economists had expected a core rate for March of 3.7 per cent.
The benchmark federal funds target range is currently set at 5.25 to 5.5 per cent — the highest since 2001 — in an attempt to rein in inflation.
The Fed’s own “dot plot” forecasts show rate-setters, as of March, expected to make three cuts this year. However, recent remarks from regional Fed presidents have cast doubt on those projections.
While Fed chair Jay Powell still believes in a “base case” that shows inflation drifting down towards the central bank’s 2 per cent goal, others on the Federal Open Market Committee are increasingly concerned that price pressures will prove stickier than expected.
Chicago Fed president Austan Goolsbee has expressed concern that housing inflation will remain too strong, while Dallas chief Lorie Logan has warned of greater “upside risk” to the outlook.
While neither Goolsbee nor Logan has a vote on the FOMC, Atlanta Fed president Raphael Bostic does and has consistently warned that the Fed may struggle to cut more than one time this year.
