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New inflation reading offers hope for Fed rate cuts
Inflationary pressures eased in April, but the progress was probably not enough to prompt the Federal Reserve to cut interest rates.
“It’s a step in the right direction,” said Bank of America Securities American economist Stephen Juneau. But “is it enough for the Fed to get too excited? Probably not yet.”
In April, the Consumer Price Index on a “core” basis, which excludes food and energy prices, increased 3.6% year over year. This was in line with expectations and cooled down from the 3.8% increase seen in March.
Monthly base price increases reached 0.3%, in line with expectations, and below the 0.4% in the previous three months.
The numbers likely aren’t enough to immediately alter the Fed’s longer-term hike stance following hotter-than-expected inflation reports earlier in the year.
In fact, Fed Chairman Jerome Powell made it clear on Tuesday that he thinks the Fed will need more than a quarter of data to truly assess whether inflation is steadily falling to 2%.
This implies that it will take more than three inflation reports for the Fed to feel confident about cutting rates from the 23-year high, increasing the odds of a first rate cut in September if the data supports such a move.
Following Wednesday’s CPI release, markets were predicting a roughly 53% probability that the Fed would begin cutting at its September meeting, according to data from the CME FedWatch tool. This represents about a 45% chance in the previous month.
Federal Reserve Chairman Jerome Powell at a Financial Stability Oversight Council meeting on May 10 in Washington, DC. (Photo by Kent Nishimura/Getty Images) (Kent Nishimura via Getty Images)
Investors now anticipate about two 25 basis point cuts this year, down from the six cuts expected at the start of the year, according to updated data from Bloomberg.
Powell said Tuesday that his confidence that inflation will continue to cool is not as high as it was at the start of the year and that the central bank will need to be patient before cutting interest rates.
“I think it may take longer than expected to do its job and reduce inflation,” he said at a panel in Amsterdam.
Powell seemed to think that bringing the latest inflation rate down to 2% could take longer and potentially be more painful than last year’s steady declines, month after month.
This is because he believes that the supply chain issues that were driving up prices have largely been resolved and it is now about moderating consumer demand.
Other Fed officials also emphasized patience. On Monday, Fed Vice Chairman Philip Jefferson said the Fed would need “additional evidence” that inflation is falling toward the Fed’s 2% target before cutting interest rates.
The story continues
“Until we have that, I think it’s appropriate to keep the policy rate in restrictive territory,” Jefferson said during a question-and-answer session at the Cleveland Fed.
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