U.S. Inflation Tops Expectations – Fed to Rethink Rate Cuts?

Annual U.S. inflation came in slightly higher than expected in February, as markets are still holding on to any hope that interest rate cuts from the Fed are coming soon.

• The Consumer Price Index (CPI) rose 0.4% MoM in February, up from a 0.3% a month earlier, reported the Labour Department on Tuesday.

• CPI inflation rose 3.2% YoY, up from 3.1% in January.

Forecast had estimated for a monthly price increase of 0.4% last month compared to January, with inflation expected to remain unchanged at 3.1%.

• Core CPI – which excludes food and energy – rose 3.8% YoY, down from 3.9% in January. 

• Economists had expected core CPI to come in at 3.7%.

Tuesday’s inflation report is believed to have somewhat of an effect on next week’s Fed meeting, where market sentiment is expecting the Fed to hold interest rates at their unchanged range of 5.25-5.50%.

Fed Chair Powell had already reiterated to lawmakers that U.S. Central Bank is in no rush to cut interest rates.

Policymakers need to be fully convinced that the battle over inflation is now done – however, yesterday’s data has definitely changed things up.

“When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin” cutting rates, he told the Senate banking committee.

• A March rate cut is now effectively and definitely ruled out.

• The inflation target is 2%.

The Federal Reserve was already taking its sweet time to announce any rate cut later in the year, and with inflation coming out even higher than expected, we can now anticipate further delays.

Turbulence took over the markets after the data came out. Initially, traders focused on specific details indicating potential relief regarding inflation.

However, the attention was then turned to headline figures:

1. Treasury yields rose

2. S&P 500 opened slightly higher

Other than the upcoming release of the produce price index (PPI), this is the last major inflation report the Fed will be seeing before its meeting next week.

A second straight month of stronger-than-expected inflation has officially shut the door on the possibility of an interest rate cut before June.

Traders are pricing in more than a 70% chance that the Fed could start cutting interest rates by June, according to the CME FedWatch tool – but will this change?

Now that policymakers are expected to hold interest rates steady for a fifth consecutive meeting, economists will be looking out for any clues as to when, and if, the central bank will start lowering borrowing costs.