Fed's Inflation Gauge Heats Up in April; Interest Rate Cuts Expected to Fade
The Federal Reserve's preferred inflation measure showed prices continuing to rise in April as Middle East conflict pushes oil prices higher, making it increasingly unlikely the Fed will cut interest rates this year and raising prospects of potential rate hikes.
What Happened
The inflation-pressures-mount-8GhLGnf0">Federal Reserve's preferred inflation gauge showed prices continued rising in April, as the conflict in the Middle East pushed oil prices higher. Core inflation hit an annual rate of 3.3% in April, as expected, Fed's preferred gauge shows. The data reinforces a pivotal shift in market expectations regarding the central bank's policy path.
Market Reaction and Policy Outlook
Wall Street investors no longer foresee any rate reductions this year, according to futures pricing tracked by CME Fedwatch. And the odds of a rate hike by October have risen to nearly 25%, up from zero just a week ago. The estimates are in line with Fed officials' expectations, many of whom have said inflation is moving in the wrong direction and that the risks are shifting from a balance between inflation and deterioration in the job market to a greater concern about rising prices. Most Fed officials see holding interest rates steady for now, with a growing chorus not ruling out a rate hike if inflation becomes persistent.
Broader Economic Context
Federal Reserve officials' concerns about inflation being stoked by the Iran war intensified last month, with a growing number of them saying the central bank should lay the groundwork for a possible rate hike, a sign that incoming Chair Kevin Warsh will inherit an increasingly hawkish crew of central bankers. Federal Reserve Chair Jerome Powell, at a news conference last week, said that assuming the impact would be temporary is more challenging now because inflation has been above its 2% target for five years, souring many Americans on the economy.
What to Watch
After eight years with Powell at the helm, Warsh will convene his first Fed meeting on June 16-17 with no prospect seen for a change in rates, and certainly not a cut. Federal Reserve governor Lisa Cook is closely watching the risk that companies could embed higher energy costs into the prices they set while workers incorporate them into the wages they negotiate. She noted that she's "prepared to raise rates" if inflation doesn't fall in a "timely manner."