Stubborn Inflation Puts Pressure on Fed to Cut Interest Rates; Stock Market Drops
Inflationary pressures persisted in March, causing concern for the Federal Reserve and raising doubts about the possibility of interest rate cuts later this year. The U.S. Department of Labor reported on Wednesday that the consumer price index (CPI) had risen by 3.5% year-on-year in March, surpassing economists’ expectations and February’s increase of 3.2%. The core CPI, which excludes food and energy prices, also saw increases higher than anticipated.
The news of rising inflation led to a sharp drop in the stock market, with the Dow Jones falling over 400 points to its lowest level in almost two months. Government bond yields rose in response to the data, indicating that future interest rate cuts could be delayed or reduced.
The benchmark 10-year U.S. Treasury yield reached 4.559%, its highest level since November, and experienced the largest one-day gain since September 2022. A 10-year U.S. Treasury note auction encountered weak demand, with investor participation at its lowest since November 2022.
Traders are now predicting that interest rates could reach around 5% by the end of the year, suggesting only one or two 25 basis point rate cuts in 2024. This is a significant shift from earlier expectations of six to seven rate cuts by the Fed.
“Inflation pressures remain firm across the board,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. The strong inflation data may delay the Fed’s plans to cut interest rates and prompt them to keep rates steady, due to concerns about the economy’s strength.
Federal Reserve Chairman Jerome Powell has indicated readiness to cut interest rates but emphasized the need for caution. Previous expectations of three rate cuts this year may be revised, with economists now predicting only two cuts in July and September.
The latest CPI report has reignited concerns about the challenge of combating inflation in the United States. While inflation has slowed since its peak in mid-2022, the recent data suggests a persistent struggle to bring inflation back to target levels.
Consumer sentiment remains affected by the high cost of living, with surveys showing ongoing frustration among Americans. The outlook for interest rates and inflation in the coming months will depend on how the economy responds to these persistent inflationary pressures.
Overall, the data indicates a rocky road ahead for the Federal Reserve as it navigates the delicate balance between stimulating economic growth and controlling inflation.