Strong US CPI inflation rules out a June interest rate cut: latest analysis from Close Bros AM

by | Apr 17, 2024

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With the market now pricing in 1-2 interest rate cuts by the Fed this year, and top US central bank officials including Fed Chair Jay Powell (pictured) holding back in statements this week, from giving any indication of when interest rates might be cut and dashing hopes of a June cut. Now it seems that the first cut might well not come until September.

Sharing their latest analysis into US monetary policy and what we might expect to see in the weeks and months ahead, Close Brothers Asset Management said:

“Rate expectations shifted significantly last week, in the wake of a strong US inflation print. In March, headline CPI accelerated to 3.5% year-on-year, up from 3.2% and ahead of consensus (3.4%), while core CPI remained at 3.8%, ahead of consensus (3.7%). Within the print, food (14% of the basket) accelerated to 0.1% from 0.02%, along with medical care, furnishings, other goods & services and apparel. This was partly offset by a deceleration in shelter (34% of the basket), transport and autos, services, recreation, fuel & utilities, communications, education and tobacco.

“The March print follows a number of beats year-to-date, and the stronger than-expected report led market participants to reprice the likelihood of rate cuts, from three starting in June or July to two starting in September or November.

 
 

“This repricing is in contrast with the Fed’s own sanguine view of economic data. At the March FOMC meeting, Chair Powell brushed off concerns about stronger CPI prints as “bumps in the road” – confirming that the inflation “story is really essentially the same.” He also maintained his confidence measures of rents and rent-proxies should decline, and that the labour market was easing.

“The question now is for how long the Fed maintains confidence in the economy slowing, if inflation remains stronger than expected. Key factors to watch will be the labour market revisions and how owner equivalent rent calculations evolve. Given the large basket weight of shelter, a decline in imputed rental costs, which is expected given where market prices are, could have a strong cooling effect on CPI.

“It is also worth remembering that it is Personal Consumption Expenditures Index (PCE) rather than CPI that is the Fed’s official target and that, despite recent strength in CPI, PCE is still expected to cool in coming months.

 
 

“While we still expect some cuts this year, this recent resilience is a reminder that the Fed may wait longer to deliver rate cuts. Nonetheless, with current policy relatively restrictive, the Fed can cut rates without making policy accommodative.”

 
 

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