Traders raise chances of Fed rate cut after inflation report

Shoppers during the opening of a Costco Wholesale store in Kyle, Texas, on Thursday, March 30, 2023.

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Even as inflation far exceeded the Federal Reserve’s target, markets became more confident on Wednesday that the central bank would cut interest rates as soon as September.

The annual rate of inflation is measured in CPI fell to 4.9% in Apriltwo-year low but still more than double the Fed’s 2% target.

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The latest inflation readings are expected to show that prices are still rising

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Still, that was enough for traders to increase the likelihood of a rate cut in September to nearly 80%, according to CME Group. Fed Watch tracker prices in the federal funds futures market. In fact, the October federal funds contract implies a policy rate of 4.84%, or nearly a quarter of a point lower than the current effective rate of 5.08%.

Still, among Wall Street analysts and economists, the possibility of a rate cut remains shaky.

“The timing of the first rate cut will depend on how quickly inflation slows and how quickly the job market becomes less tense,” said Bill Adams, chief economist at Comerica Bank. A softer jobs picture and continued decline in inflation “will allow the Fed to begin cutting rates as early as this fall.”

However, the standard seems high for rate cuts, even if central banks decide they can pause rate hikes for now.

New York Fed President John Williaman influential policymaker and voter on the Federal Open Market Committee that sets the rate, said on Tuesday he does not expect that policy to ease at all this year, although he leaves open the possibility beyond that.

“According to my forecast, we need to maintain a restrictive policy stance for a long time to ensure that we actually reduce inflation,” he said in an interview. appeared in front of the Economic Club of New York. “I don’t see in my baseline forecast any reason to cut rates this year.”

However, markets are pricing in multiple cuts for 2023, totaling 0.75 percentage points, that would bring the Fed’s benchmark rate down to its target range of 4.25%-4.5. %. The central bank raised lending rates last week by a quarter point, to 5.0-5.25 percent, the 10th increase since March 2022.

Policymakers will likely continue to quash those expectations for easier policy in the coming months, even if they choose not to raise rates.

Former PIMCO chief economist: Fed's overall message will be high for longer

“That’s what they’re really pushing back to our expectations in the market that they’re going to ease. But they’re not pushing the point that the highest interest rates will be,” said Paul McCulley, a former Pimco chief executive. higher”. and is now a senior fellow in financial macroeconomics at Cornell, said Wednesday on “Dancing on the street.”

“They’re going to sound pretty hawkish until they get a lot of clear results that we’ve actually achieved what we wanted,” McCulley said.

The April CPI report gave mixed signals on inflation trends, with the core index, which excludes food and energy costs, holding steady at 5.5% year-on-year.

Furthermore, a Atlanta Fed rate “fixed CPI,” Price measures don’t tend to change much, just slightly lower at 6.5% in April. The flexible price CPI, which measures more volatile items such as food and energy costs, rose to 1.9%, up 0.3 percentage points.

PNC senior economist Kurt Rankin wrote: “The reality is that the annual pace of core inflation remains well above the Federal Reserve’s 2% target and shows no sign of trending. reduction is very important”. “Cutting on this front will be necessary before the Fed’s monetary policy rhetoric can change.”

Prior to the CPI announcement, markets had priced in about a 20% chance of a rate hike at the June 13-14 FOMC meeting. After the meeting, that probability dropped to just 8.5%.

That comes despite the “previous downtrend having temporarily stalled” on inflation, wrote Andrew Hunter, deputy chief economist at Capital Economics.

“We don’t think that will convince the Fed to raise rates again at the June FOMC meeting, but it does present a risk that rates will need to stay high for a little longer,” Hunter said. than we expected.”


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