Another hotter-than-expected inflation reading is fueling investor fears that the Federal Reserve will have to push back the number and timing of interest rate cuts this year.
The Consumer Price Index (CPI) rose 3.5% over the prior year in March, an acceleration from February’s 3.2% annual gain in prices and more than economists expected.
The year-over-year change in the so-called “core” CPI — which excludes volatile food and energy prices — was 3.8%, which was the same level as February but a tenth of a percent higher than expected.
“There is no doubt this is somewhat disappointing,” Greg Daco, EY chief economist, told Yahoo Finance, adding that “there is no denying that this firmer inflation print does put more pressure on policymakers to sustain likely a higher-for-longer monetary policy stance.”
Investors agree. The stock market fell following the CPI release, and the odds in favor of a June rate cut from the Fed evaporated, stomping out what had been a commonly held belief on Wall Street.
Traders who had been betting on a June cut now see a roughly 85% chance the Fed does nothing in June and a roughly 41% chance of a cut in July.
They also scaled back the number of rate cuts they see this year to two, less than the median of three penciled in by Fed officials at their last policy meeting in March.
The minutes of that meeting released Wednesday showed that “almost all” participants agreed there would be rate cuts at some point this year even as some noted that hotter inflation readings at the start of the year shouldn’t be discounted as “statistical aberrations.”
“Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2%,” according to the minutes.
Fed officials agreed, however, that they had reached the peak on the current rate-tightening cycle and that monetary policy was well positioned to respond to the economic outlook, including the possibility of keeping rates higher for longer if inflation drops more slowly.
They expect there to be bumpy, uneven monthly inflation readings on the path to their 2% inflation target.