Fed Rate Cut Under Pressure: US Inflation on the Rise

The outlook for the Federal Reserve's first interest rate reduction before summer's end, or potentially within the year, suffered a significant blow on Wednesday, fueled by yet another stark US inflation report underscoring persistent price pressures within the economy.

Following months of anticipation for monetary easing to commence in June, market sentiment now pivots towards projecting a rate cut during the Federal Reserve's mid-September gathering, following a third consecutive robust consumer inflation reading that roiled financial markets.

The probability of the Fed refraining from rate cuts throughout the year has surged from a significant level of less than 1% a week ago to approximately 14% post-Wednesday's inflationary jolt. While this remains a prospective scenario, it's increasingly becoming a topic of discussion among economists and some Fed officials.

Minutes from the Fed's March meeting unveiled on Wednesday, revealed policymakers' pre-existing disappointment with recent inflation metrics even before the latest report.

Atlanta Fed President Raphael Bostic, for instance, has projected a single rate cut in the fourth quarter of this year.

A report from the U.S. Labor Department on Wednesday revealed that the Consumer Price Index surged by 3.5% year-over-year in March, marking an acceleration from February's 3.2% uptick.

Core Consumer Price Inflation, which excludes food and fuel costs and is a key metric for assessing price sustainability, climbed by 3.8% year-over-year, mirroring February's pace. President Joe Biden acknowledged on Wednesday that persistent inflation would likely postpone the Federal Reserve's rate-cutting plans, though he reiterated his expectation of lower borrowing costs later this year.

Fed officials, including Christopher J. Waller, emphasized the need for additional data to determine whether the stronger-than-anticipated inflation figures in January and February were merely temporary obstacles to achieving the Fed's 2% inflation target.

Traders are currently anticipating a quarter-point interest rate reduction at the Fed's September 17-18 meeting, setting a rate range of 5% to 5.25%, with the possibility of another rate cut later in the year. Three months earlier, when inflation appeared to be declining more rapidly, the Fed was expected to implement a total of five rate cuts this year.