Inflation Slowdown
Last week’s CPI report showed a slight increase in CPI. While markets reacted positively to the news, there is still significant uncertainty regarding the path for inflation. We continue to be surprised about the persistence of high prices. Oil prices likely are a main contributor as it does trickle through the entire economy.
We anticipate that the Fed will maintain a cautious approach to interest rates to ensure inflation remains under control. Our original thought was that there would be three interest rates cut this year, but that doesn't seem to be likely anymore. We believe that one rate might cut be a more realistic expectation. We will have to watch and see what inflation numbers look like as the year goes on.
A recent article highlighted the continued uncertainty around future rate cuts. Excerpts from a recent CNBC article with additional analysis are provided below:
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“The reports come with the Fed on hold since July 2023 as inflation has proved more resilient than expected. Policymakers have said in recent weeks that they need more evidence inflation is on a sustainable path back to their 2% goal before agreeing to lower rates.
The Fed’s benchmark overnight lending rate is targeted in a range between 5.25%-5.5%, the highest level in 23 years.
In remarks Tuesday, Fed Chair Jerome Powell acknowledged that readings earlier in 2024 had been higher than expected and said it’s likely the central bank will need to keep monetary policy “at the current rate for longer than had been thought.”
To financial markets, that means the Fed likely will wait out the summer for better inflation data, with an initial rate cut coming in September. That would be the first reduction since the early days of the Covid pandemic in 2020.
“We think it’s September at the earliest that they’re going to cut,” said North, the Allianz economist. “Their mind seems to be that, ‘we’re not in any hurry to cut rates. Inflation is not near 2%, the economy is OK, we’re not going anything for months.’”
Fed officials hiked the key overnight funds rate 11 times from March 2022 through July 2023 in hopes that it would help tamp down demand that drove inflation to its highest level in more than 40 years. Policymakers had thought inflation would pass once supply chain issues brought on by the pandemic eased, but powerful demand fueled by fiscal and monetary policy stimulus has kept price pressures elevated.”
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