The Federal Open Market Committee is gearing up to closely analyze the upcoming Consumer Price Index figures for March ahead of their next meeting on May 1. While no change in interest rates is expected at the meeting, relatively benign inflation data could potentially pave the way for a summer interest rate cut, aligning with the expectations of most FOMC officials and fixed-income markets.
The CPI report for March 2024 is set to be released by the Bureau of Labor Statistics on April 10 at 8:30 a.m. ET. The annual inflation rate currently stands at 3.2%, or 3.8% excluding food and energy, compared to the FOMC’s target of 2%. Additionally, the Bureau of Economic Analysis will release related Personal Consumption Expenditures inflation data for March on April 26, with PCE inflation running at a 2.5% annual rate for February.
Nowcasts indicate that inflation for March is estimated to come in at 0.34% for the month for CPI and around 0.25% for PCE inflation, with corresponding nowcasts of 0.31% and 0.23% when food and energy prices are excluded. While this would represent some disinflation from January’s elevated numbers, it would still be above the Fed’s 2% annual target. The main concern for the Fed is whether inflation is trending towards its goal or not, with some worries that inflation may persist above the target.
Federal Reserve policymakers will focus on the underlying components of inflation, particularly in the detailed pricing tables of the CPI report. Factors such as shelter prices, which make up a significant portion of household budgets, and services costs due to accelerating wage levels will be closely monitored. Trends in goods pricing, such as commodities and household goods, will also be scrutinized for any signs of changes in order to gauge progress towards the Fed’s 2% inflation goal.
Provided that inflation in March remains close to 0.3% or lower on a monthly basis, the FOMC is likely to stick to its plan to begin cutting interest rates this summer. A monthly increase of 0.4% or higher would be cause for concern, indicating a potentially troubling trend in inflation readings. Any figure below 0.2% monthly inflation would generally be seen as positive news, reinforcing the plans for rate cuts. The FOMC will also consider other factors, such as the strength of the jobs market, in their decision-making process alongside inflation data.
Overall, the upcoming release of inflation data for March will play a crucial role in shaping the Fed’s decisions on interest rates in the coming months. With expectations of a potential summer interest rate cut hinging on the inflation figures, all eyes will be on the CPI report and its implications for the broader economic outlook.
