US March CPI data exceeded expectations, shattering market expectations for a Fed rate cut in June. On the 10th, US President Biden stated that he still expects to initiate a rate cut before the end of this year, but the latest CPI data may delay the rate cut by one month. Goldman Sachs and Barclays have also revised down their expectations for Fed rate cuts this year.
The US Bureau of Labor Statistics released data last night, showing that the consumer price index (CPI) for March increased by 3.5% year-on-year, higher than the market’s expected 3.4% and higher than February’s 3.2%. This indicates that inflation remains stubborn, and the market had eagerly anticipated a rate cut by the Fed starting in June, but now it has been dampened.
After the latest CPI data was released, market expectations for a rate cut in the US in June dropped from 56.1% to 20.6%. The expected number of rate cuts by the Fed this year also decreased from 3 to 2, and the time frame for rate cuts fully priced in by the financial swap market was postponed from September to November.
Biden estimates a one-month delay in the rate cut. Whether the Fed will cut interest rates or not has a significant impact on the stock market and also affects the upcoming US presidential election in November. On the 10th, President Biden expressed his rare views on Fed monetary policy, emphasizing that he still adheres to his rate cut prediction and expects to initiate a rate cut before the end of this year. He believes that the latest CPI data may delay the rate cut by one month. Despite acknowledging persistent high inflation, Biden also defended his economic performance.
However, as the Fed is an independent institution separate from the US government, its decision-making behavior is not influenced or controlled by the government. Therefore, Biden also added that he is not clear about the exact plans of the Fed and does not want to be accused of interference (whether there is actual interference or not is unknown…).
Goldman Sachs, Barclays, and other investment banks have adjusted their rate cut expectations. With the persistently high inflation data, Wall Street giant Goldman Sachs has also adjusted its prediction for rate cuts by the Fed. They estimate that the first rate cut by the Fed will be in July instead of June. Goldman Sachs predicts that there will only be two rate cuts this year, with the first rate cut in July and the second in November, both at 1 basis point.
In fact, Goldman Sachs has revised its rate cut expectations multiple times this year. In January, Goldman Sachs predicted that the Fed would start cutting rates in March and there would be a total of 5 rate cuts this year. After the FOMC meeting in early February, Goldman Sachs postponed the timing of the first rate cut by the Fed to May and still predicted a total of 5 rate cuts this year. In late February, Goldman Sachs no longer expected a rate cut in May and predicted 4 rate cuts this year. In March, Goldman Sachs believed that the Fed would cut rates in June and that a rate cut in May seemed unlikely. They predicted 3 rate cuts this year instead of 4. Now, Goldman Sachs has once again admitted to a misjudgment and changed its prediction.
Barclays also adjusted its rate cut expectations on the 10th, believing that the Fed will only cut rates once this year, with a 1 basis point reduction. Barclays currently predicts that the federal funds target rate range will be 5.00%-5.25% by the end of 2024 and 4.00%-4.25% by the end of 2025.