Interest rates in the US are “unlikely to shift” next month in the wake of today’s higher-than-expected inflation figures in a blow to President Joe Biden, experts are warning.
Market traders slashed bets on a potential cut to the Federal Reserve’s base rate in the near future after the publication of today’s statistics from the Bureau of Labor Statistics (BLS).
In the 12 months to March 2024, the CPI rate increased to 3.5 per cent, up from 3.2 per cent the month before.
Prior to today, economists from Bloomberg forecast inflation for the period would rise slightly to 3.4 per cent.
This comes after three consecutive months of the CPI rate easing which led many analysts to bet on multiple rate cuts to the Federal Funds Rate this year.
However, these hopes have been dashed with rent and gas prices contributing to the higher-than-expected inflation rate.
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Joe Biden's economic record has taken a hit following today's inflation figures
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The Biden Administration will likely be disappointed by the latest inflation figures as they hope to see improvements in the US economy since the COVID-19 pandemic.
The Federal Open Market Committee (FOMC) has raised interest rates to a range of 5.25 per cent to 5.50 per cent.
With today’s release from the BLS, bond yields soared and stock futures plummeted in reaction to the news.
Traders dramatically cut expectations with many now only pricing in between one and two 0.25 per cent cuts this year.
This is in stark contrast to the six or seven interest rate cuts that were priced in at the beginning of January.
Prior to this morning’s announcement, traders saw an interest rate cut from the Fed as near certainty by July 2024.
However, this bet on the timing been nearly halved from nearly 98 per cent to 50 per cent due to inflation remaining above the Federal Reserve’s desired two per cent target.
Richard Flynn, the managing director at Charles Schwab UK, warned that imminent reductions to interest rates are unlikely to take place given inflation increased last month.
Mr Flynn explained: “Today’s figures show that the rate of inflation has increased compared to last month.
“Every piece of economic data is now being placed under the microscope as the market tries to predict when monetary policy will change, but these figures are unlikely to cause a shift.
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Reuters“In recent months it has become clear that the journey to the Fed’s target of two per cent inflation will be bumpy and Central Bankers are proceeding with caution when it comes to rate changes.
“It’s often said that the Fed takes the escalator up and the elevator down when setting rates, but for the path downwards in this cycle, it looks like they will opt for the stairs.”
Eswar Prasad, an economics professor at Cornell, highlighted that it is a case of when, not if, rates eventually being brought down.
He said: “Even if the Fed’s policy pivot toward cutting interest rates is still on the table for 2024, recent data have greatly complicated the task of finding the right time for a move that avoids constraining growth while also not prematurely declaring victory against inflation.”
