Source: Golden Ten Data
The Federal Reserve needs at least three optimistic inflation reports before it is likely to cut interest rates for the first time in September.
The April CPI data shows that inflationary pressure has eased somewhat, but this progress may not be enough to push the Federal Reserve to cut interest rates as soon as possible.
Excluding food and energy prices, the core CPI rose 3.6% year over year in April. In line with expectations, it has cooled down from the 3.8% increase in March; the core CPI growth rate was 0.3% month-on-month, in line with expectations, lower than 0.4% in the previous three months.
However, these data may not be enough to immediately change the Federal Reserve's position on maintaining high interest rates for a longer period of time. Stephen Juneau, an American economist at Bank of America Securities, said:
“This is a step in the right direction for inflation, but is that enough to make the Fed too excited? Probably not.”
“Federal Reserve microphone” Nick Timiraos also wrote that the report itself was not enough to convince officials that the three higher-than-expected inflation figures at the beginning of this year deviated from the downward trend in price pressure expected by policy makers. Since two reports are likely to be needed to support officers' confidence that inflation can return to the low levels that prevailed before the pandemic, the Federal Reserve may not be preparing to cut interest rates until September.
In fact, Federal Reserve Chairman Powell made it clear on Tuesday that he believes the Federal Reserve will need at least one quarter of data to truly determine whether inflation is falling steadily to 2%. This means that the Federal Reserve will need more than three inflation reports to be confident of lowering interest rates from a 23-year high. If the data supports interest rate cuts, the Fed is likely to cut interest rates for the first time in September.
According to the CME Federal Reserve Observation Tool, after the CPI was announced on Wednesday, the market expected the possibility that the Fed would cut interest rates at the September meeting to be about 53%. This percentage is up from about 45% the previous month. Investors currently expect the Federal Reserve to cut interest rates 2 times this year, which is lower than what they expected at the beginning of the year to cut interest rates 6 times.
Among the big players on Wall Street, Xiaomo and Goldman Sachs continue to be firm in their expectations that the Federal Reserve will cut interest rates in July. Xiaomo said that the April CPI data gave people a sigh of relief. Inflation is returning to a downward trajectory. It is still believed that the Federal Reserve will cut interest rates for the first time in July, but this may require further cooling of labor market activity before it can be achieved. Goldman Sachs said that they maintain the expectation that the Federal Reserve will cut interest rates by 25 basis points for the first time in July, and it is expected that the Fed will cut interest rates once a quarter thereafter.
Damo, on the other hand, said that they expect inflation to cool down even more in the future, especially in the second half of the year, and they believe that the Federal Reserve will cut interest rates for the first time in September this year.
Powell said on Tuesday that his confidence that inflation will continue to cool down is not as high as at the beginning of the year, and the Federal Reserve needs patience before cutting interest rates. “I think this may take longer than expected to take effect and reduce inflation.”
Powell seems to think that reducing the inflation rate to 2% may take longer, and may be more painful than last year's steady decline month by month. Because he believes that the supply chain problems that earlier drove up inflation have basically been solved, the problem now is how to curb consumer demand.
Other Federal Reserve officials also emphasized patience. On Monday, Federal Reserve Vice Chairman Jefferson said that before cutting interest rates, the Federal Reserve needs “additional evidence” to prove that inflation is falling to the Fed's 2% target. “Until then, I think it is appropriate to keep policy interest rates within a restricted range.”