With no improvement in inflation statistics beyond the first quarter of 2024, any potential first rate cut by the Federal Open Market Committee is expected to be delayed until at least July, and possibly beyond. Monthly consumer price index data for January, February and March suggested that the path to achieving the FOMC's annual inflation target of 2% will not be easy.
This is because the composite CPI has been increasing on an annual basis since January 2024, according to the two latest releases. Disinflation will continue even as food and energy prices are stripped away, but perhaps at a slower pace. The headline annual CPI inflation rate in March 2024 is 3.5%, or 3.8% excluding food and energy. Recent inflation data may not be enough for the FOMC to cut interest rates in the near term.
Upcoming FOMC meetings
Bond markets see little chance of the FOMC cutting rates at its May meeting, according to the CME FedWatch tool. The probability of a rate cut in June is now about 1 in 4, but this is significantly lower than it was before March's CPI data was released.
Markets are currently saying that the first rate cut is most likely after July, and while there is a possibility that the Fed will not cut rates at all in 2024, it is becoming more likely. The FOMC last raised interest rates in July 2023, so peak interest rates could rise. Eventually it lasts more than 12 months. This would be unusual in historical context, as historically the FOMC has moved quickly to cut rates after the last rate hike, but this business cycle is unusual in many ways.
Federal Reserve officials predicted on March 20 that there could be two or three rate cuts in 2024, according to a summary of economic forecasts. However, this was before the CPI was announced in March, making it a somewhat outdated forecast.
Still, FOMC policymakers have said multiple times that they believe interest rates are likely to have peaked now. Economic forecasts by FOMC policymakers will next be updated on June 12th.
Job data
Job data is also important. However, the latest March jobs report suggests that the U.S. job market is relatively healthy. Concerns about an economic slowdown that a weakening job market could suggest could prompt the FOMC to cut interest rates. This is due to the FOMC's dual mission of controlling inflation and preserving employment. So far, the FOMC has been able to patiently keep interest rates at relatively high levels with the goal of sustained improvement while monitoring inflation data. If the employment report weakens significantly, the FOMC will be faced with the dilemma of trading off the desire to control inflation with promoting strong employment.
what to expect
For now, although the more extreme waves of inflation have passed, there are concerns that underlying inflation remains well above the Fed's 2% target. With the job market remaining relatively strong, the Fed has time to wait and see how inflation data develops.
As for 2024, there is so far little evidence of further disinflation, and rate cuts are likely to be delayed compared to earlier expectations. The FOMC is still expected to cut rates in 2024, but they may be fewer in number than previously expected and may start later.