In March, the Federal Reserve’s inflation measure remained high, indicating that price increases were not subsiding as quickly as expected. This could lead to interest rates staying higher for a longer period of time than anticipated. Investors had initially hoped for rate cuts in 2024, but as inflation persisted, these hopes dwindled. The latest reading of the Personal Consumption Expenditures index suggests that the Fed may be cautious in considering when to lower borrowing costs, as the overall inflation index rose by 2.7 percent in the year through March.
The core inflation measure, which excludes food and fuel costs, increased by 2.8 percent on an annual basis, in line with February’s reading but slightly higher than economists’ forecasts. While inflation had been decreasing steadily towards the end of 2023, progress has stalled in recent months, leading policymakers to reassess the timing and size of potential rate cuts. Fed Chair Jerome H. Powell indicated that central bankers were not seeing the progress they had hoped for that would warrant lowering rates. If inflation remains above the Fed’s 2 percent target, it could prompt officials to keep interest rates high for an extended period of time.
Policymakers raised interest rates to 5.33 percent between March 2022 and the summer of 2023, and have kept them at that level since. While they believe this level is restrictive enough to eventually impact the economy, some economists question if it is truly restrictive given the continued solid growth and rapid hiring. Data released in March showed that consumer spending rose 0.8 percent for the second consecutive month, supported by a strong market that has driven up wages. Stock indexes saw a positive reaction to the data, with investors expecting a potential longer duration of high rates.
Investors now anticipate that the Fed may delay its first rate cut until September or later, or may not reduce rates at all this year, based on market pricing. Some economists are even considering the possibility of the Fed raising rates again, particularly if there is a significant acceleration in the inflation rate. Fed governor Michelle Bowman has acknowledged the potential for further rate increases, although it is not her base outlook. Overall, the uncertainty surrounding inflation and interest rates has led to speculation among economists and investors about the Fed’s future policy decisions, with some contemplating the potential for rate hikes in the coming months.
