Shoppers during the grand opening of a Costco Wholesale store in Kyle, Texas, on Thursday, March 30, 2023.
Jordan Vonderhaar | Bloomberg | Getty Images
Even with inflation running well above the Federal Reserve’s goal, markets became more convinced Wednesday that the central bank will be cutting interest rates by as soon as September.
The annual inflation rate as measured by the consumer price index fell to 4.9% in April, its lowest level in two years but still more than double the Fed’s 2% target.
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Still, it was enough for traders to raise the chances of a September rate cut to near 80%, according to the CME Group’s Fed Watch tracker of prices in the fed funds futures market. In fact, the October fed funds contract implied a policy rate of 4.84%, or nearly a full quarter point below the current effective rate of 5.08%.
Among Wall Street analysts and economists, though, the case for a rate cut remains shaky.
“The timing of a first rate cut will depend both on how quickly inflation slows and how quickly the job market becomes less tight,” said Bill Adams, chief economist for Comerica Bank. A softer employment picture and further declines in the inflation rate “would allow the Fed to begin reducing interest rates as early as this fall.”
However, the bar seems high for a rate cut, even if central bankers decide they can halt increases for now.
New York Fed President John Williams, an influential policymaker and voter on the rate-setting Federal Open Market Committee, said Tuesday he doesn’t expect that policy will ease at all this year, though he left open the possibility beyond that.
“In my forecast, we need to keep a restrictive stance of policy in place for quite some time to make sure we really bring inflation down,” he said during an appearance before the Economic Club of New York. “I do not see in my baseline forecast any reason to cut interest rates this year.”
Still, markets are pricing in multiple cuts for 2023, totaling 0.75 percentage points,…
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