Inflation Data Reinforce Powell’s Shift Toward High for Longer

Fresh inflation data released today cemented the message from Federal Reserve Chair Jerome Powell last week that high interest rates are here to stay for now.

The Fed’s preferred gauge of underlying inflation climbed 0.3 percent in March and 2.8 percent from a year earlier, the same as the prior month. Figures from earlier this year were also revised up slightly, government data showed.

The three straight months of worrisome inflation data indicate that progress toward the central bank’s 2 percent inflation goal has stalled and suggest that the first interest rate cut will be pushed further out. Investors see one to two rate cuts this year, beginning in November, but concerns are growing that the Fed may not lower borrowing costs at all in 2024.

“The hot inflation readings through March should write off any rate cuts in the first half of 2024,” said Nationwide Senior Economist Ben Ayers. “There is also a risk that the further economic resilience pushes off any rate declines until 2025, a key downside risk for growth next year.”

The government data today also underscored the strength of the U.S. economy. Inflation-adjusted consumer spending grew 0.5 percent for a second straight month in March, matching the strongest advance since the start of 2023.

Quarterly figures released yesterday for the core personal consumption expenditures price index, which excludes food and energy, topped forecasts and sparked concern the March advance would prove even stronger.

“They are willing to sit tight for now because they see policy as already restrictive,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. But after Thursday’s report, “I think it’s a relief to them that it wasn’t higher.”

Fed officials are widely expected to hold rates at a more than two decade high when they meet next week. Policymakers will not release updated projections until their gathering in June. But it’s clear the median official may no longer expect three cuts this year, as they did in their March rate forecasts, known as the “dot plot.”

“The balance of risks have shifted squarely to the upside on inflation,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “Compared to the March dots officials are likely projecting at least one fewer cut this year, which means starting later.”

Powell said last week the Fed was prepared to keep policy restrictive “as long as needed” if price pressures persist.

“The Fed will inevitably sound more hawkish next week than it did in March,” and Powell may reiterate his comments, said James Knightley, chief international economist at ING. “They will still talk of an anticipated moderation but acknowledge that they really need to see that over a number of months before they can relax.”

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