Is the Fed Considering Another Interest Rate Hike Soon?
Since last year, Wall Street has been fixated on rate cuts following indications from Federal Reserve officials. However, with persistent inflation, investors are now contemplating a potential shift towards a rate hike instead. Discover the latest insights on the Federal Reserve's stance on interest rates.
Wall Street has been closely watching interest rate cuts since the end of last year, following signals from Federal Reserve officials about lowering rates. However, with inflation remaining stubborn, some investors are now considering the possibility of a rate hike.
In 2023, inflation significantly decreased as the Fed raised rates to levels not seen in nearly a quarter-century, maintaining them at that level since July. Despite these efforts, recent economic data suggests that there has been limited improvement this year.
The latest Consumer Price Index report for March revealed a 3.5% increase in prices compared to the previous year, surpassing both February's 3.2% and economists' predictions. This marks the highest reading in six months.
The spike in gas prices and ongoing high housing costs were the main factors driving this unexpected rise. The report caused concern on Wall Street, leading to a significant sell-off on Wednesday and decreasing the likelihood of a rate cut in June, as indicated by futures.
Most Fed officials have indicated their intention to reduce rates this year, assuming the economy progresses as anticipated. However, recent disappointing inflation data, such as Wednesday’s report, may cause them to hesitate. If inflation continues to worsen, the Fed may even have to contemplate increasing rates.
Fed Governor Michelle Bowman, known for her strong stance on monetary policy, expressed her willingness to support a rate increase if inflation shows signs of slowing down or reversing.
Minneapolis Fed President Neel Kashkari, on the other hand, raised the idea of keeping rates unchanged throughout the year. Although he mentioned that rate hikes are still a possibility, he emphasized that they are not expected. Kashkari is not involved in making monetary policy decisions this year.
New York Fed President John Williams, like Bowman and Kashkari, stated that he does not foresee any rate hikes in the near future. He emphasized that he is not even thinking about increasing rates at this time.
Allianz Chief Economic Adviser Mohamed El-Erian talks inflation with Richard Quest and Julia Chatterley.
Allianz Chief Economic Adviser Mohamed El-Erian talks inflation with Richard Quest and Julia Chatterley.
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Sticky inflation increases the likelihood of a situation where interest rates cannot be lowered.
Williams, when asked by CNN during a discussion with reporters, mentioned that he does not see any indications that the measures taken to limit demand are not working as intended. He stated that there are certain situations where raising interest rates would be justified, such as a significant increase in inflation. However, he noted that the current trend does not align with that scenario.
Williams, a top adviser to Fed Chair Jerome Powell, still thinks it's a good idea to lower interest rates later this year. However, he didn't mention exactly how much or when.
Boston Fed President Susan Collins stated on Thursday that the recent data hasn't significantly altered her perspective. She emphasized the uncertainties regarding timing and the importance of being patient, as there may still be uneven disinflation.
The strong job report from last month, with the economy adding 303,000 jobs in March (surpassing the expected 205,000), is a reason for the central bank to be patient with cutting rates. This could mean fewer cuts this year than previously anticipated. Collins, who is not involved in policy decisions this year, had mentioned at the end of last year, when CPI was lower, that more rate hikes were a possibility.
On the other hand, Powell has not recently discussed the potential need to raise interest rates. He mentioned last month that the higher-than-expected inflation reports at the beginning of the year could have been influenced by "seasonal factors."
During the March meeting, not all Fed policymakers agreed with the assessment that recent increases in inflation were just statistical aberrations. Some argued that the inflation was broad-based and should not be dismissed.
Officials are currently anticipating a rate cut sometime this year. The latest economic projections from officials show that they mostly expect a rate cut this year, but there is a division on how aggressive the cuts should be. Ten officials are expecting three or more quarter-point cuts, while nine estimate two or fewer.
What prominent economists are saying
Former Treasury Secretary Larry Summers said Wednesday the March CPI report raises the odds that the Fed will hike rates.
In a recent interview on Bloomberg TV, Summers emphasized the importance of considering that the next interest rate adjustment could be an increase, not a decrease.
Back in 2021, Summers was among the few economists who accurately predicted that inflation was not temporary as the Federal Reserve had suggested, but instead a more pervasive and lasting issue.
Consumer prices rose 3.5% for the 12 months ended in March, surpassing economists' expectations.
Consumer prices rose 3.5% for the 12 months ended in March, surpassing economists' expectations.
David Paul Morris/Bloomberg/Getty Images
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US inflation unexpectedly rose in March, defying expectations.
Following the release of the CPI report on Wednesday, leading economists from UBS, Barclays, Goldman Sachs, and Bank of America have all delayed their predictions for the first rate cut.
Bank of America economists are now forecasting only one rate cut this year, which they predict will happen in December. Initially, they had anticipated up to four cuts, with the first one possibly taking place in March.
In a note on Thursday, the economists compared the current situation to that of 2015, but in reverse. They pointed out that back then, the Fed had hinted at rate hikes that did not materialize, whereas now, the Fed might be hinting at cuts that are not supported by the inflation data.
The timing of the initial rate cut is crucial. If the Fed cuts rates too early, it may lead to high inflation becoming permanent. On the other hand, cutting rates too late could harm the economy unnecessarily. This is why the Fed is waiting to gather more data before making any decisions about the economy, such as whether inflation has truly come to a halt.
Editor's P/S:
Inflation remains a persistent concern for the Federal Reserve, casting doubt on the likelihood of interest rate cuts this year. Despite aggressive rate hikes in 2023, inflation has shown limited improvement, prompting some Fed officials to reconsider their stance. The latest Consumer Price Index report revealed a 3.5% increase in prices compared to the previous year, the highest in six months, driven by rising gas prices and housing costs. This unexpected surge has led to a sell-off on Wall Street and a decrease in the likelihood of a rate cut in June.
While some Fed officials, such as Michelle Bowman, are open to supporting a rate increase if inflation does not show signs of slowing down, others, like John Williams, maintain that they do not foresee any rate hikes in the near future. The strong job report from last month and the uncertainties regarding the timing of disinflation are also contributing to the central bank's patience in cutting rates. However, the recent disappointing inflation data and the warnings from prominent economists like Larry Summers highlight the growing concerns about inflation and the potential need for the Fed to reconsider its current trajectory. The timing of the initial rate cut is crucial, and the Fed is closely monitoring economic indicators before making any decisions.
