Markets sharply reduce rate cut bets after US inflation hits 3.5%

Markets sharply reduce rate cut bets after US inflation hits 3.5%

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Traders reduced their bets on a Federal Reserve interest rate cut on Wednesday after U.S. inflation beat expectations and Joe Biden acknowledged there was “more to do” to combat the rise prices.

Bond yields jumped, stocks fell and markets pushed back their forecasts for summer rate cuts after official data showed a 3.5 percent rise in consumer prices for the year through ‘in March.

“Today’s report shows that inflation has fallen more than 60 percent from its peak, but we still have much to do to reduce costs for hard-working families,” the president said. American after the publication of the data.

Wednesday’s figure compares with forecasts for a 3.4 percent rise. Core inflation also exceeded expectations due to price pressures in service sectors such as health care and auto insurance.

“We have to take seriously the possibility that the next rate move will be up rather than down,” said former Treasury Secretary Larry Summers, a sign of the effect of inflation data on expectations rate.

Speaking to Bloomberg, he added that a June rate cut “would be a dangerous and egregious mistake.”

The figures are the latest to show that the U.S. economy is more buoyant than expected, a potential problem for Biden as he seeks to overtake Donald Trump’s lead in the polls ahead of this year’s election.

Before today’s data release, higher-than-expected releases in January and February had already raised concerns among policymakers that inflation would prove too sticky to allow them to cut rates as soon as expected .

While officials still believe they remain broadly on track to meet their 2 percent goal, minutes of the Federal Open Market Committee’s vote, released Wednesday afternoon, showed factors ranging from rising oil prices and real estate costs to easing financial conditions, which are a factor in the rise. risks for this base scenario.

Pricing officials also expressed concern that high pricing pressures “continue to harm households, particularly those least able to afford the higher costs of essential goods like food, housing and transportation.

Markets are now betting that rate cuts may not begin until the Fed meets right after the Nov. 5 vote.

Futures traders have lowered their rate cut expectations to anticipate cuts of between one and two quarter points this year, compared to at least six cuts in early January.

Immediately before Wednesday’s data release, markets were expecting between two and three declines this year.

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Traders had also previously viewed a July rate cut as a near certainty, but halved their bets on that timing, from around 98 percent to 50 percent after Wednesday’s report.

Although markets still estimate a very high probability of a rate cut by September, they have not fully priced in a cut before the Fed meeting on November 6-7.

The two-year Treasury yield, which moves with interest rate expectations, jumped sharply to 4.97 percent late afternoon, just off a four-month peak at 4.98 percent.

The S&P 500 closed down almost 1 percent, with about nine out of 10 stocks losing ground.

“Even though the Fed’s policy direction toward lower interest rates remains in place for 2024, recent data has greatly complicated the task of finding the right time for a decision that avoids constraining growth altogether. by not prematurely declaring victory against inflation,” Eswar said. Prasad, professor of economics at Cornell University.

The CPI rose to 3.2 percent in February from 3.1 percent in January and last week’s bumper jobs numbers led markets to further dampen expectations of a Fed rate cut.

In his response to the figures released Wednesday, Biden called on businesses, including food retailers, “to use their record profits to reduce prices.” He also attacked congressional Republicans, whom he accused of “helping special interests and big drug companies raise prices.”

The U.S. president told a news conference Wednesday that he still believes the Fed will cut rates this year, but said inflation data released earlier could delay that timetable by a month or two beyond his initial expectations.

The Bureau of Labor Statistics said core inflation, which excludes changes in food and energy costs, remained at 3.8 percent, the same rate as February. Economists had expected a policy rate of 3.7 percent for March.

The Fed’s own forecasts show that in March, policymakers expected three cuts this year in the benchmark rate, its current 23-year high of 5.25 percent, to 5.5 percent.

However, recent remarks from regional Fed presidents have cast doubt on these projections.

While Fed Chairman Jay Powell still believes in a “base case” that shows inflation drifting toward the central bank’s 2% target, other FOMC members are increasingly concerned that price pressures are proving more persistent than expected.

Chicago Fed President Austan Goolsbee expressed concern that housing inflation remains too high, while Dallas Fed Chief Lorie Logan warned of more “upside risk.” important for the outlook.

Although neither Goolsbee nor Logan have the right to vote at the FOMC, Atlanta Fed President Raphael Bostic does and has consistently warned that the central bank may have difficulty cutting interest rates several times this year.

Additional reporting by Demetri Sebastopulo in Washington


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