Are hopes of a Federal Reserve rate cut fading away?

WASHINGTON (TND) — Hopes of a looming interest cut rate from the Federal Reserve are continuing to fade away as hot economic data keeps bringing disappointing results for the central bank’s hopes to see inflation continuing to cool on its path back toward 2%.

Another blow was dealt to hopes of a rate cut on Friday with the release of the Fed’s most closely watched measure of inflation, which showed that inflation remained sticky in March. It was the latest in a series of recent economic reports that have indicted higher prices are hanging around longer than the central bank would like to see.

Wall Street investors and economists came into the year expecting rate cuts to begin in the spring, but those hopes have been repeatedly dashed as economic reports found elevated inflation or underlying data that bolstered inflationary pressures.

The personal consumption expenditures index rose 2.7% on an annual basis through March, which was higher than economists had projected and an uptick from 2.5% in February. The so-called “core” reading, which strips volatile food and energy prices, increased 2.8% in March, also above expectations but consistent with February’s reading.

Friday’s PCE report is expected to further reduce the chances of a Fed rate cut this summer, but isn’t indicating prices are going out of control again.

“We see headline and core PCE inflation moving toward a 2.5% year-over-year ‘inflation plateau’ over the summer and fall. Importantly, this plateau won’t be so far above 2% that it would warrant excessively tight monetary policy,” EY Chief Economist Gregory Daco said. “First principles continue to favor disinflation and policymakers’ laser-focused battle to rapidly bring inflation to the 2% target could do more harm than good for the U.S. economy.”

The PCE figure comes after the consumer price index rose to 3.5% on an annual basis in March, an increase from 3.2% in March. Consumer spending is also still strong and coming in above the rate of inflation, especially on services, which is continuing to add pressure on prices.

Despite higher interest rates, the labor market has stayed robust throughout the Fed’s inflation crackdown with strong jobs figures and low unemployment, which has given consumers confidence to continue spending money despite frustrations with inflation.

Higher interest rates mean higher costs for businesses and consumers for things like credit cards, auto loans and business loans to expand or grow. Raising interest rates is meant to cool economic activity by making it more expensive to borrow money, which helps reduce pressure on prices and inflation over time. But it also makes it more expensive for consumers that are grappling with years of elevated prices for everyday purchases like groceries and gas, adding to the challenge for their wallets.

Federal Open Markets Committee members are facing a difficult balance when it comes to when they start cutting interest rates. If they move too soon, inflation could accelerate out of control again, while waiting too long risks sending the economy into a tailspin.

Initial estimates of first quarter gross domestic product, the total output of goods and services, slowed to start the year at an annual pace of 1.6% in a reflection of an economy trying to withstand the higher rates.

Several FOMC members have said they don’t believe there will be a need to further raise rates and are opting to take their time in cutting them instead. Fed chairman Jerome Powell has described initial higher inflation reports as “bumps” in the road to lower inflation but is still favoring caution when it comes to cuts.

"The recent data have clearly not given us greater confidence, and instead indicate that it's likely to take longer than expected to achieve that confidence,” Powell said at an event in Washington earlier this month.

Some economists have started to project the Fed may not cut rates at all this year or reduced predictions down to rate cuts. Another view, though less common among economists, is that the hot inflation reports and robust consumer spending could prompt the Fed to move forward with another increase.

“While the contrarian view of Fed rate hikes has become trendy, we continue to stress that the bar for rate hikes is elevated. Almost all policymakers believe that the policy rate is likely at its peak for this tightening cycle and that it will be appropriate to ease policy at some point this year,” Daco said.