Markets Expect FED Rate Cut Sooner Than Analysts the FED Itself
The USD has turned bearish in the last two weeks after a round of soft economic data for the US, as markets expect a FED rate cut by August.
The USD has turned bearish in the last two weeks after a round of soft economic data for the US, as markets expect a FED rate cut by August. The US CPI and PPI inflation reports came below expectations last week, while employment has also shown some weakness recently, so traders are expecting the FED to hint at a rate cut soon, but the FOMC comments don’t suggest that at all, as Cleveland FED chair Mester confirmed a while ago, and major investors think that the FED will hold on for longer.
Comments from the Cleveland Fed President Loretta Mester
- Monetary Policy Position: The Fed is reviewing more data to assess the appropriate stance of monetary policy, indicating a data-dependent approach.
- Inflation Outlook: The Fed acknowledges that it will take longer to gain confidence that inflation is moving towards the 2% target. This suggests caution regarding the pace of inflationary pressures.
- Risks to Inflation: There’s an acknowledgment that risks to the inflation side of the mandate have increased, indicating concerns about potential upward pressure on prices.
- Risks to Growth and Hiring: On the other hand, downside risks to growth and hiring have fallen, suggesting optimism about the economic recovery.
- Expectations on Inflation Progress: The Fed anticipates gradual progress on lowering inflation, indicating a patient approach to addressing inflationary pressures.
- Labor Market Conditions: The assessment of strong labor market conditions reflects optimism about employment levels and economic activity.
- Policy Impact on Inflation: The current policy stance is expected to contribute to lowering inflation, indicating the Fed’s commitment to addressing inflation concerns.
- Response to CPI Data: The Fed welcomes the latest CPI data as a sign of cooling inflation, suggesting that recent developments align with their outlook and objectives.
Bank of America thinks that the headline CPI for April increased by 0.3% month-on-month, slightly lower than expectations. However, the year-on-year rate fell to 3.4%. Core CPI, which excludes volatile food and energy prices, also rose by 0.3% month-on-month, with a year-on-year rate of 3.6%. The data indicates that core goods prices declined, driven by lower prices for new and used cars.
On the other hand, core services, particularly rents, remained high but showed signs of moderate deceleration. While these figures may be seen as favorable, it’s important to note that inflation remains above the Federal Reserve’s 2% target. Additionally, the forecast core Personal Consumption Expenditures (PCE) inflation rate for April is 0.23% month-on-month, indicating a slight drop but still reflecting excessive inflationary pressures.
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