With inflation remaining hotter than desired in the first quarter of 2024, the Fed's first expected interest rate cut in more than four years continues to push through later in the calendar, with some wondering whether the central bank will lower its benchmark. Standard rate at all this year.
Investors will get another glimpse into the inflation picture on Wednesday when the US Labor Department publishes its April Consumer Price Index report. However, we expect a new round of speculation about when the Fed will finally ease interest rates.
The CPI is expected to rise to 0.4% on a monthly basis in April, compared to 0.4% in March. On an annual basis, this means an increase of 3.4% compared to 3.5% in the previous month.
Excluding volatile categories such as food and energy, core CPI is expected to rise 0.3% month-on-month versus 0.4% in March, and 3.6% year-on-year, compared to 3.8% the previous month.
With January, February and March CPI reports looking hotter than expected, Fed spokesmen have been repeating the “Higher for longer” message.
Traders cut their bets that the target range for the federal funds rate will fall by 25 basis points at their June meeting from the current level of 5.25%-5.50%, with that probability falling to 9.1% from 26.9% a month ago. The chance of a 25 basis point cut in July fell to 26.0% from 44.5% a month ago, according to CME FedWatch. a tool.
mile trip
Sarah House and Wells Fargo economists said: “Beginning with the April CPI, second-quarter inflation data will be crucial in determining whether pricing strength early in the year was a brief detour on the road to cooling inflation or whether the journey has become Much longer.” Aubrey George in a recent note.
They argue that time is “running out on the clock” to cut interest rates in late summer. “We believe the FOMC will need to see at least three benign core inflation readings, and perhaps even four, before easing policy, absent a rapid deterioration in labor market conditions,” House and George said.
In the goods sector, new and used car prices are likely to fall again. In the services sector, economists see a slight moderation in primary housing inflation – to 0.41% in April versus 0.46% in the first quarter. They also expect smaller gains in Medicare, autos, internet and personal services.
More trouble for the Fed?
Not everyone is confident that declining inflation will reassert itself. “Don't be surprised if the April CPI report signals more trouble for the Fed,” said Michael Cramer, head of the investment group at Mott Capital Management. It notes that since August 2022, the CPI, seasonally adjusted, has risen linearly at an annual growth rate of 3.6%, a trend that has been in place for 19 months. Furthermore, CPI swaps indicate a risk that the CPI will rise more than 3.4% year over year in April, with CPI swaps priced at 3.42%.
Research by Alpha Analyst Damir Tokic highlights the importance of the April report and how the stock market is likely to react. “If inflation shows signs of slowing, the federal funds rate will remain in place, and this could positively impact the stock market in the near term. However, a hot inflation reading will confirm fears of stagflation, essentially eliminating the federal funds rate, which is likely,” he said. “It will cause a major sell-off in stocks in the near term.”
Consumer Price Index vs. Personal Consumption Expenditures
While the CPI provides some information on inflation dynamics, the Fed places more weight on personal consumption expenditures, especially the core PCE price index. The CPI measures the prices of a specific basket of goods and services, while the PCE Price Index measures consumers' actual expenditures, which can reflect trading down to less expensive brands or other trade-offs. The next personal consumption expenditures report, issued by the Department of Commerce, will be released on May 31.
