Inflation data released last week showed that consumer prices in the US rose again in February. Consumer prices rose 0.4% for the month and 3.2% from a year ago, and this was higher than market expectations.
This may keep the central bank on its course to wait for some more time before starting to lower interest rates. The Fed has not adjusted interest rates since July 2023,
According to the CME FedWatch tool, there is a 99% probability of the federal funds target range being retained at 5.25-5.50%. A month back, around 10% probability was given for a cut in rates by 25 basis points in the upcoming meeting.
Meanwhile, the employment data looked encouraging, as non-farm payrolls in the US rose by 275,000 in February, which surpassed market expectations. This further dampened expectations of a rate cut coming as soon as this month.
Minutes of the last meeting of the Fed also indicated that the central bank’s policy moves had succeeded in lowering the rate of inflation from 4-decade high. However, the pace of easing of inflation has slowed down.With inflation not cooling off at the expected pace and job market conditions remaining strong, the Fed would rather wait and keep assessing the incoming data before deciding to slash rates.The focus, however, won’t be on the rate action of the Fed, but on what may happen months from now.
The question is whether it will lower rates in June as the bond market currently expects, and how many cuts one can expect in 2024.
Hints about the timing and scope of rate cuts could come from the Fed’s so-called dot plots, a quarterly visual depiction of individual officials’ economic and interest rate forecasts.
In December, the central bank had guided for three rate cuts in 2024, totalling 75 basis points.
“However, we believe that the Fed could dial down from the current 3 rate cut and could provide a 2-rate cut scenario on the back of sticky inflation despite the economy staying strong,” said Reliance Securities.
“The market has still yet to factor in a 2-rate cut situation, and this could be bullish for the dollar index,” the brokerage firm said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
