In March the Consumer Price Index inflation rate rose more than expected by economists for a third straight month, the Bureau of Labor Statistics reported this morning. That looks to the market today, and to me, like it takes an initial interest rate cut off the table for the Fed’s June 12 meeting.
The all-items inflation rate rose by 0.4% in March from February. The 12-month all-items inflation rate rose at a 3.5% rate in March.
The core CPI, the inflation rate more important to the Federal Reserve, rose 0.4% month-over-month in March. And at a 3.8% annual rate. (The core inflation rate excludes changes in more volatile food and energy prices.)
The fear in recent months is that reductions in the inflation rate had slowed and that inflation was hanging on at a higher level than the Fed’s 2% target. That fear looks to be confirmed in today’s data. And with Federal Reserve officials repeatedly saying they are in no rush to cut rates and would wait for data to confirm that inflation will reach that 2% target, the market today has concluded that a June 12 interest rate cut is now extremely unlikely.
In recent weeks traders and investors had taken the possibility of an initial interest rate off the table for the May 1 meeting. Today, April 10, the CME Fed Watch Tool, which uses prices in the Fed Funds Futures market to calculate the odds of a Fed move, says the odds of no change in rates at the May 1 meeting stand at 96.1%. Those odds aren’t significantly higher than they were yesterday before the CPI report.
The odds of a June 12 rate cut, however, moved big time today. The odds of the Fed keeping interest rates at the current level at the June meeting climbed to 83% today. Yesterday, April 9, the odds that rates would stay the same were only 42.6%.
Today’s inflation report put a July 31 cut in question too. Odds of no cuts at the July meeting climbed to 57.3% from just 25.0% yesterday.
Even a September cut seems less likely today than it did yesterday. Odds of no cut at the September 18 meeting rose to 31.5% today from 8.5% on April 9.
As you might imagine, stocks and bonds weren’t amused by the CPI inflation report.
As of noon New York time today, April 10, the Standard & Poor’s 500 was down 1.19% and the Dow Jones Industrial Average was off 1.26%. The NASDAQ Composite was lower by 1.06% and the small-cap Russell 2000 index had tumbled 2.59%.
Prices in the Treasury market fell, which drove yields higher. The yield on the 10-year Treasury note rose to 4.51% as of noon on April 10. The yield on the 10-year Treasury is now up 43 basis points in the last month. (100 basis points make one percentage point.)
Even by the Fed’s preferred core reading which is designed to throw out items to make inflation appear better than it is, the Fed should be considering a rate hike in early 2024. To give time for the existing hikes to work through the system. The more important thing to note is that money is easy. The Fed is running at 5.25-5.5% target. When you subtract inflation the real interest rate is 2.0% which is likely below the neutral rate. If our dovish fed wants to get serious about inflation and combating Washington’s drunken spending spree (you get free money, and you get free money) I’d estimate we need 2 rate hikes next year, and a real attempt at cutting spending to get the local/state/federal budgets on a path to paying down the debt to cut inflation. Heck if government would do its part we wouldn’t need more rate hikes,