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Traders trimmed their bets on imminent interest rate cuts from the Federal Reserve on Wednesday after data showed US inflation rose to 3.5 percent in March, beating expectations and marking the second straight increase.
The annual CPI figure compares with expectations for a 3.4 percent rise, according to economists polled by Bloomberg, while the core figure was also larger than expected.
The consumer price index rose to 3.2 percent in February from 3.1 percent in January.
Bond yields jumped and stocks fell after the data was released, as US President Joe Biden acknowledged there was “more to do” to combat inflation.
Markets are now betting that interest rate cuts may not begin before November, at the Federal Reserve meeting scheduled immediately after the US presidential election.
As futures traders have dramatically lowered their expectations for interest rate cuts, they are pricing in between a quarter-point and a quarter-point cut this year, compared to six or seven at the start of January.
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Before the inflation figures were published, markets were expecting cuts of between two and three this year.
Traders had previously considered a July interest rate cut almost certain, but they cut their bets on that timing in half from about 98 percent to 50 percent after Wednesday's report.
While markets are still giving a very high probability of a rate cut by September, they have not fully priced in a cut until the Fed's November 6-7 meeting.
The two-year Treasury yield, which moves with interest rate expectations, jumped 0.205 percentage point to 4.95 percent, though it then fell mid-morning in New York.
The S&P 500 fell about 1.1 percent shortly after the Wall Street opening bell.
“Even if the Fed's policy pivot toward lower interest rates is still on the table for 2024, recent data has greatly complicated the task of finding the right time for action that avoids restricting growth while not prematurely declaring victory over inflation,” Eswar said. “. Prasad, professor of economics at Cornell University.
The higher-than-expected inflation numbers represent a blow to Biden, who is struggling to convince voters of his economic record as he intensifies his campaign for the November 5 elections.
Last week's bumper jobs numbers had already prompted markets to rein in expectations of interest rate cuts from the Federal Reserve.
But while Biden touted a strong labor market, the cumulative price increases during his first term hurt consumers' purchasing power.
“Today's report shows that inflation has fallen more than 60 percent from its peak, but we must do more to reduce costs for hard-working families,” the US President said on Wednesday.
Biden called on companies, especially food retailers, to “use record profits to lower prices.” He also attacked Republicans in Congress, whom he accused of “helping special interests and Big Pharma raise prices.”
The Bureau of Labor Statistics added Wednesday that core inflation, which excludes changes in food and energy costs, remained at 3.8 percent, the same as February. Economists had expected the base rate for March to reach 3.7 percent.
The target range for federal funds is currently set at 5.25 to 5.5 percent — the highest level since 2001 — in an effort to rein in inflation.
The Fed's own forecasts show that rate setters expect to make three cuts this year. However, recent statements by regional Fed heads have cast doubt on those forecasts.
While Fed Chairman Jay Powell still believes in a “base case” that shows inflation drifting toward the central bank's 2 percent target, others on the Federal Open Market Committee are increasingly concerned that price pressures will be more persistent than expected. Expected.
Chicago Fed President Austan Goolsbee expressed concern that housing inflation will remain too strong, while Dallas Bank President Lori Logan warned of a greater “upside risk” to the outlook.
While neither Goolsbee nor Logan has a vote on the FOMC, Atlanta Fed President Raphael Bostic does and has consistently warned that the Fed may have difficulty cutting rates more than once this year.
