Following the higher-than-expected increase in US CPI in January, the released PPI data on Friday also exceeded market expectations, highlighting the continued inflationary pressure. A Federal Reserve official stated that it would be appropriate to start cutting interest rates in the third quarter of this year. However, former US Treasury Secretary Lawrence Summers warned today that there is still a possibility of the Federal Reserve raising interest rates in its next move.
Summary:
Fed officials reassure the market: CPI exceeding expectations does not require an excessive reaction, and the start of interest rate cuts is not far away.
Background:
US CPI exceeds expectations, no hope for interest rate cuts in March! Bitcoin falls below $49,000 and rebounds, while Ethereum falls below $2,650.
Table of Contents:
CPI and PPI both exceed expectations, market bets on rate cuts in June
Former US Treasury Secretary: There is still a possibility of “rate hikes” by the Federal Reserve
Federal Reserve official: Interest rate cuts may only begin in the summer
US 10-year Treasury yield rises, surpassing 4.3%
The US Bureau of Labor Statistics released key inflation data on Friday (16th).
Report:
It showed that the US Producer Price Index (PPI) in January increased by 0.9% year-on-year, higher than the market’s expected 0.6%. The monthly increase was reported at 0.3%, also exceeding the market’s expected 0.1%, marking the largest increase in five months.
The core PPI in January, excluding food and energy, increased by 2% year-on-year and 0.5% month-on-month, both surpassing economists’ expectations and marking the largest increase since January 2023. The January PPI was driven by an increase in service costs, with a monthly increase of 0.6%, the largest increase since July last year.
On the other hand, the Consumer Price Index (CPI) for January, announced on the 13th, increased by 3.1% year-on-year, higher than the market’s expected 2.9%. The core CPI, which excludes food and energy costs, increased by 3.9% year-on-year, also higher than the expected 3.7%. These two inflation data points highlight the persistent inflationary pressure in the US and make the market more pessimistic about the Federal Reserve’s interest rate hike expectations in the first half of the year.
The CME Fed Watch tool shows that the market believes that there is a 90% chance that the Federal Reserve will temporarily suspend interest rate hikes at the March meeting, and the probability of maintaining the interest rate at the May meeting has risen to 61.6%. The market believes there is a slight majority (53.7%) chance of the first interest rate cut in June.
Market expectations for the Federal Reserve to start cutting interest rates are now expected to be delayed until at least June. Source: CME Fed Watch tool
It is worth noting that after the release of the inflation data this week, former US Treasury Secretary Lawrence Summers made surprising remarks in an interview with Bloomberg today, stating that inflationary pressures still persist in the United States, and the next policy move by the Federal Reserve could be “rate hikes” instead of rate cuts.
Summers pointed out that economists currently expect housing costs to become an important deflationary factor in the overall price index, but this has not yet materialized. “Excluding the rental part, the cost of owner-occupied housing has not shown deflationary conditions and may continue to put pressure on prices for the remaining time in 2024.”
In addition, he believes that another worrying key issue is “service costs,” which do not include food and energy costs or housing costs pushed up by wage increases. This indicator showed significant growth in January.
Summers said that the inflation data this week “undoubtedly questioned the assumption that inflation in a calm and healthy real economy will drop to the 2% target.” As for when the Federal Reserve may start cutting interest rates, he predicted, “It is unlikely in May at the moment.”
After the unexpected inflation reports were released this week, other Federal Reserve officials expressed their views on the anticipated interest rate cuts that the market had been eagerly anticipating. Raphael Bostic, the president of the Atlanta Federal Reserve Bank, who has voting rights this year, stated that “interest rate cuts may not start until the summer” and predicted that there would be two interest rate cuts this year. However, if inflation data is optimistic, the number of interest rate cuts may increase to three.
Mary Daly, the president of the San Francisco Federal Reserve Bank, urged the Fed to resist the temptation to cut interest rates as soon as possible and patiently wait for the right time to cut rates. Thomas Barkin, the president of the Richmond Federal Reserve Bank, stated that the latest inflation data this week highlights the reason why policymakers want to see more data before cutting interest rates.
On the other hand, after the release of CPI and PPI data this week, the US bond market saw an increase in selling and an upward movement in bond yields. CNBC data shows that the yield on 10-year Treasury bonds rose above 4.3% today, while the yield on 2-year Treasury bonds rose to nearly 4.65%, reaching the highest level since mid-December last year when the Federal Reserve hinted that interest rates had peaked.
With the increase in bond yields, bond prices have fallen in the opposite direction, causing losses for bond investors who had previously bought at low prices. Today, many PTT netizens commented, “The bond frogs are crying in the bathroom,” and “It seems unlikely that interest rates will be cut in Q1.” However, some netizens believe that it is unlikely for interest rates to rise next, and the rates will stay high for a longer period of time.
Related Articles:
US banking crisis reappears! Arthur Hayes: The Fed will print money to save the market, and Bitcoin will rise to $1 million.
Powell suggests 3 interest rate cuts in 2024, and the Fed will not start easing monetary policy until after March at the earliest.
US non-farm payrolls in January “far exceeding expectations,” first round of interest rate cuts expected to be postponed until June, BTC plunges and then rebounds to $43,000.