A second straight month of stronger-than-expected inflation has effectively shut the door on the possibility of a Federal Reserve interest-rate cut before June, with some traders and analysts betting central bankers may need to wait even longer.
Gasoline and shelter prices drove the February consumer price index up 3.2% versus a year earlier, an acceleration from January’s 3.1% increase. Underlying core inflation, excluding gas and food prices, slowed less than economists had forecast, and on a three-month and six-month basis actually gained traction.
Fed policymakers are meeting next week and are universally expected to leave the policy rate in its current 5.25%-5.5% range, where it has been since last July.
Until recently there had been some speculation that a rate cut could still come at their following meeting on April 30-May 1 if inflation, which fell rapidly last year and then jumped in January, resumes its path toward the Fed’s 2% goal.
But Tuesday’s inflation report “is an ugly read that will do nothing to sooth nerves” at the Fed, wrote BMO economist Scott Anderson. “Clearly, restrictive monetary policy has not yet fully done its work and a patient and slightly hawkish Fed must remain in place for the monetary medicine to fully take effect.”
Core services inflation excluding rents, a measure to which Fed Chair Jerome Powell has said he pays close attention, rose 0.5% in February from a month earlier, and over the past three month is up on an annualized basis by 6.8%, compared with the 6.7% pace in January.
Those sticky-hot readings will add to Fed caution on the inflation outlook, said Nationwide’s Kathy Bostjancic.
“While we thought a May cut was on the table, it is increasingly likely that the FOMC waits at least until June to start easing monetary policy,” she said.
Traders of futures contracts that settle to the Fed’s policy rate are pricing in a less-than-one-in-10 chance of a May rate cut, but continue to see about a 70% chance of a rate cut by June.
After the inflation data they slightly pared their view of how much the Fed will cut rates by year-end, though in all they still expect the central bank will deliver four quarter-point rate cuts from June to December.
https://www.investing.com/news/economy/traders-keep-bets-on-june-for-first-fed-rate-cut-after-inflation-data-3334262
