Interest rate cuts have been a prominent topic on Wall Street ever since Federal Reserve officials hinted at lowering rates last year. However, stubborn inflation has some investors considering the possibility of a rate hike. Inflation slowed in 2023 due to the Fed raising rates to a nearly quarter-century high and holding them since July, but recent economic data shows little improvement this year. March’s Consumer Price Index report revealed a rise in prices to 3.5% from a year earlier, higher than expected, primarily driven by surging gas prices and high housing costs, leading to a mass selloff on Wall Street.
Despite most Fed officials signaling their intention to cut rates this year if the economy evolves as expected, disappointing inflation readings like March’s report are causing some hesitation. Fed Governor Michelle Bowman suggested a rate hike if progress on inflation stalls, while Minneapolis Fed President Neel Kashkari mentioned the possibility of not cutting rates at all this year, with rate hikes still on the table. New York Fed President John Williams also does not foresee rate hikes in the near future, emphasizing the importance of achieving goals related to demand management.
Despite significant job growth reported in March, causing some officials like Boston Fed President Susan Collins to urge patience in cutting rates, Fed Chair Jerome Powell has not addressed the potential need to raise interest rates. Expected to cut rates at some point this year, policymakers are divided on the timing and number of cuts, with some expecting three or more quarter-point cuts, while others anticipate two or fewer. Former Treasury Secretary Larry Summers commented on the March CPI report, suggesting increased odds of a rate hike based on the current inflation data.
Following the recent CPI report, economists from major banks have adjusted their forecasts on the timing of the first rate cut, with Bank of America now predicting only one rate cut in December, compared to their previous forecast of as many as four cuts. The timing of the first rate cut is crucial, as cutting too soon could lock in high inflation, while cutting too late could harm the economy. Fed officials are waiting for more data before making a decision, including whether inflation has indeed stalled, to ensure the appropriate actions are taken to support economic stability.
