Traders brace for Fed rate cut after April inflation report

Markets became more confident on Wednesday that the central bank will cut interest rates until September, despite inflation running above the Federal Reserve’s target.

annual inflation rate as measured by Consumer price index fell to 4.9% in AprilIts lowest level in two years but still more than double the Fed’s 2% target.

Still, it was enough for traders to raise their chances of a September rate cut to 80%, according to CME Group. Fed Watch Tracker Fed funds futures market prices. In fact, the October fed funds contract implied a policy rate of 4.84%, or nearly a full quarter point below the current effective rate of 5.08%.

Among Wall Street analysts and economists, however, the case for a rate cut remains shaky.

“The timing of the first rate cut will depend on how quickly inflation slows and how quickly the job market eases,” said Bill Adams, chief economist at Comerica Bank. A softer jobs picture and further decline in inflation “will allow the Fed to lower interest rates further this fall.”

However, the bar seems high for a rate cut, even if central bankers decide they can hold off on hikes for now.

New York Fed President john williamsAn influential policymaker and voter on the rate-setting Federal Open Market Committee said Tuesday he does not expect policy to ease at all this year, though he left open the possibility beyond that.

“In my forecast, we need to maintain the accommodative stance of policy for some time to ensure that we actually bring down inflation,” he said An appearance before the Economic Club of New York, “I see no reason in my baseline forecast to cut interest rates this year.”

Still, markets are pricing in multiple cuts for 2023, totaling 0.75 percentage point, which would take the Fed’s benchmark rate to its target range of 4.25%-4.5%. The central bank last week raised its fed funds rate by a quarter point to 5.0%-5.25%, its 10th increase since March 2022.

Policymakers will continue to lower those expectations for easier policy in future months, even if they choose not to raise rates.

Paul McCully, former Pimco managing director, said, “They’re really pushing back our expectations in the market that they’re going to ease. But they’re not pushing the assumption that peak rates are going to be higher.” ” and currently Senior Fellow in Financial Macroeconomics at Cornell told CNBC’s “screaming in the street,

Using a market term for a preference for higher rates and tighter monetary policy, McCully said, “they seem to be quite choppy until they get a very clean reading.”

April CPI Report Excluding food and energy costs, with the core reading holding fairly steady at 5.5% annually provided mixed signals about the direction in which inflation is headed.

Besides, a Atlanta Fed gauges “Sticky CPI,” Prices, a measure that doesn’t move much, were only slightly lower in April at 6.5%. The flexible-price CPI, which measures more volatile items like food and energy costs, rose 0.3 percentage point to 1.9%.

“The fact remains that the annual pace of core inflation remains well above the Federal Reserve’s target of 2% and shows no signs of slowing,” PNC senior economist Kurt Rankin wrote in response to the CPI data. “Reduction on this front will be necessary before a change in the Fed’s monetary policy rhetoric can be expected.”

Prior to the CPI release, markets were pricing in a roughly 20% chance of a rate hike at the June 13-14 FOMC meeting. After the meeting, this probability dropped to only 8.5%.

It came even as “the previous downward trend for inflation temporarily stalled”, wrote Andrew Hunter, deputy chief economist at Capital Economics.

“We don’t think the June FOMC meeting will persuade the Fed to hike again, but it does suggest a risk that rates will need to stay higher for a while,” Hunter said.