Investors heavily reduced their predictions of imminent cuts to the Federal Reserve rate on Wednesday. This followed the release of data indicating a rise in American inflation to 3.5% in March, exceeding forecasts and marking the second consecutive inflation increase. Economists polled by Bloomberg had predicted a 3.4% inflation increase. The central consumer price index figure was also higher than expected.
Previously, the Consumer Price Index (CPI) had seen a rise to 3.2% in February from 3.1% in January. The news resulted in an upswing in bond yields and a decline in stock futures. Futures traders massively cut back on rate cut forecasts, projecting between one and two quarter-point cuts this year, a considerable shrink from the six or seven predicted at the start of January.
Prior to the release of the inflation reports, the market had forecasted between two and three cuts for the year. There was also high expectation for a July cut with traders betting around 98% in its favour. However, following Wednesday’s data, predictions for a July cut plummeted to just 58%.
The increase in US inflation resulted in the two-year Treasury yield, which shifts with interest rate forecasts, increasing by 0.19 percentage points to 4.9%. Additionally, S&P 500 futures plummeted 1.5%. “Even if a shift towards cutting interest rates is still considered by the Fed in 2024, determining an ideal timing that doesn’t inhibit growth or prematurely celebrate winning over inflation has been complicated by recent data,” said Eswar Prasad, an Economic Professor at Cornell.
The Bureau of Labor Statistics also announced Wednesday that core inflation, which excludes fluctuations in food and energy costs, remained steady at 3.8%, identical to the February rate. Economists had projected a core rate of 3.7% for March. To curb inflation, the benchmark federal funds target range is currently set at its highest since 2001 – between 5.25 to 5.5%. – Copyright The Financial Times