US inflation increases as doubts grow over timing of Fed rate cuts

Markets no longer anticipating rate cut in June, after Consumer Price Index rises 3.5 per cent in March

The latest inflation report came as the Fed and central banks in Europe, the UK, the UAE and elsewhere embrace a wait-and-see approach as they consider the timing of cutting interest rates.. Reuters

US inflation increased again last month, frustrating hopes the Federal Reserve will cut interest rates in June and also signalling higher-for-longer rates in the UAE and Saudi Arabia.

The Consumer Price Index (CPI) rose 0.4 per cent in March, unchanged from its monthly gain in February, the Labour Department reported on Wednesday. But it rose on an annual basis at 3.5 per cent, a larger increase than the 3.2 per cent yearly rise in February.

"This may delay [a rate cut] a month or so ... We don't know what the Fed is going to do for certain," President Joe Biden told reporters.

Core CPI – which excludes food and energy – rose 3.8 per cent on an annual basis, unchanged from the increase in February.

A survey of economists polled by FactSet predicted inflation would rise 3.4 per cent year-on-year. Core CPI was expected to increase 3.7 per cent annually.

The latest inflation report came as the Fed and central banks in Europe, the UK, the UAE and elsewhere embrace a wait-and-see approach as they consider the timing of cutting interest rates.

The Fed, which has kept the rate range steady between 5.25 and 5.50 per cent since July, had kept its forecast in place for three quarter-point cuts this year after a series of economic figures showed progress in taming inflation stalled. Those projections will be updated after the Fed's meeting in June.

The CPI report is the latest sign in the Fed's stalled progress against inflation, which has been steadily rising. Fed officials have said they want “greater confidence” before cutting interest rates but are now more likely to hold them at the 23-year high for longer than expected.

Traders are no longer pencilling in a June rate cut following the latest inflation report, data from the CME Group showed. Markets, which at one point forecast as many as seven rate cuts this year, now believe the Fed will keep rates steady until September.

Market projections are in line with those of Art Hogan, chief market strategist at B Riley Wealth.

“On the good-news front, all of the economic data is stronger than had been anticipated when we started the year and that’s what drives corporate profits, which is likely positive for equity markets,” he told The National via email.

Andersen Capital Management founder Peter Andersen, who argues for no cut rates at all this year, said he is preparing his portfolios accordingly.

“Since I didn't think the Fed was going to cut ever, I prepared the portfolio for that kind of environment. But I think people that have not structured their portfolio for no cuts, they're going to be in trouble,” he told The National.

After the report's release, Wells Fargo updated its near-term outlook to project two quarter-rate cuts this year as its best case scenario.

“Today's inflation data are likely to keep the FOMC's doves on the defensive while providing more ammunition to the committee's hawks, who are increasingly of the view that there is no rush to start cutting the Fed funds' rate,” Wells Fargo senior economists Sarah House and Michael Pugliese wrote in a note.

Speaking at the Stanford University's Graduate School of Business in California last week, Fed Chair Jerome Powell said the US central bank has time to consider its decision.

“It is too soon to say whether the recent readings represent more than just a bump,” he said.

Hotter-than-anticipated inflation readings, coupled with strong employment gains and economic growth, could suggest the Fed will keep its target range steady for longer.

Mr Powell last week said he still expects rate cuts this year but did not offer a timetable or indicate what the number of rate cuts would be, repeating that the Fed wanted more confidence before dialling back on its restrictive policy.

Some Fed officials, however, did offer projections ranging from zero to three rate cuts this year. Fed Governor Michelle Bowman also left open the possibility of raising rates again “should progress on inflation stall or even reverse”.

The Fed holds its next two-day policy meeting on April 30-May 1.

Fed officials see 'somewhat uneven' disinflation path

Wednesday's CPI report seemed to confirm what Fed officials expect to be a “somewhat uneven” disinflation path back to 2 per cent, the central bank's long-term target.

According to minutes from the Fed's March 19-20 meeting, almost all officials believed it would be appropriate to dial back its restrictive stance at some point this year if the economy evolves as expected.

“Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably towards 2 per cent,” the minutes read.

“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 per cent.”

Minutes also showed that some participants also believe geopolitical tension resulting in supply bottlenecks or higher shipping costs could place upwards pressure on prices, among other inflationary pressures.