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Inflation Concerns Push Fed Rate Cut Predictions to September

By:
James Hyerczyk
Published: May 20, 2024, 20:33 GMT+00:00

Key Points:

  • Fed officials express caution, delaying rate cut expectations amid persistent inflation concerns.
  • April's consumer price data encouraging but not sufficient for imminent rate cut.
  • Fed Vice Chair Jefferson emphasizes need for careful assessment of incoming economic data.
  • Market now anticipates first rate cut in September, not June, reflecting cautious Fed stance.
  • Cleveland Fed President Mester warns slow inflation decline could delay or alter rate cut plans.
Federal Reserve Rate Cuts

Fed’s First Rate Cut: Market Eyes September

The debate over the timing of the Federal Reserve’s first rate cut has intensified, with market sentiment now leaning towards a postponement until September. This shift comes amid persistent inflation concerns and recent statements from key Fed officials.

Fed Officials’ Commentary

Several Fed speakers have emphasized that inflation remains a significant challenge, dampening hopes for an early rate cut. Fed Vice Chair Philip Jefferson remarked, “It is too early to tell whether the recent slowdown in the disinflationary process will be long lasting,” even as he acknowledged that April’s consumer price data was “encouraging.” He described current monetary policy as restrictive and stressed the need to carefully assess incoming economic data before considering any rate cuts.

Fed Vice Chair of Supervision Michael Barr noted the “disappointing” first-quarter inflation readings. “They did not provide me with the increased confidence that I was hoping to find to support easing monetary policy,” Barr stated. Both Jefferson and Barr reinforced the message that rate cuts are on hold until there is clear evidence that inflation will return to the Fed’s 2% target.

Cleveland Federal Reserve Bank President Loretta Mester, speaking to Bloomberg TV, shared her view that inflation will decline this year, albeit more slowly than anticipated. “If inflation stalls or gains ground, the Fed is well-positioned to respond either by holding rates at current levels for longer or, if appropriate, raising the rate,” Mester said.

San Francisco Fed President Mary Daly, in an interview with Axios, expressed similar caution. While she sees no evidence of the need to hike rates further, Daly is “not confident” that inflation is on a clear path towards 2% and sees no urgency to cut rates.

Market Implications

Consumer prices cooled in April, and retail spending did not increase, indicating the economy may be losing steam. However, persistent higher-than-expected inflation readings from the first quarter have made Fed policymakers wary of moving too quickly to reduce rates. This caution is reflected in market expectations, with traders now anticipating the first rate cut in September rather than June.

Federal Reserve Governor Michelle Bowman reiterated her openness to raising interest rates if inflation persists. “While the current stance of monetary policy appears to be at a restrictive level, I remain willing to raise the target range for the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or reversed,” Bowman stated.

Conclusion: Fed Caution Suggests Rate Cut Unlikely in June

The consensus among Fed officials underscores a cautious approach towards rate cuts. Despite encouraging signs in April’s consumer price data, the central bank remains focused on ensuring that inflation is firmly on track towards its 2% target. With key policymakers emphasizing the need for more data and a thorough assessment of economic conditions, the prospect of a rate cut in June appears increasingly unlikely. As the market adjusts its expectations, the focus will remain on incoming economic data and the Fed’s subsequent responses in the coming months.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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