Powell’s Rate Cuts May Go from Steady to Steep

• The third time is not the charm. March’s higher-than-expected inflation number, announced on Wednesday, follows hot prints in January and February and kills off the prospects the Federal Reserve will lower borrowing costs in June. The central bank has hinted at three small rate cuts this year; however, economic data and political tensions may force it into fewer, but bigger, reductions.
• Fed Chair Jerome Powell had said the previous two pieces of inflation data might have been “bumps in the road”, but the current figures suggest bigger issues are afoot. The Consumer Price Index rose at an annual rate of 3.5% in March, faster than the 3.2% recorded in February, due to higher gasoline, rent and food costs. Although the Fed targets a different inflation yardstick that has been undershooting CPI, the pace of price growth is well above its 2% goal.
• The Fed indicated it may make three cuts this year, of 25 basis points each, to bring rates from the current 5.25% to 5.5% range to around 4.5% to 4.75%. However, if Powell doesn’t start cutting in June, his window will get narrower.
• Notably, while Powell may choose not the wade in the hot political waters, fewer bigger cuts are risky. Two 50-basis point reductions would bring rates below the level forecast by the Fed last month, increasing the chances of a pickup in inflation. Keeping rates higher through 2024 could curb economic growth and even cause a recession. Still, if economic data and political realities block the road to lower rates, Powell may be tempted to take a shortcut and enact fewer bigger cuts.
• The Fed meets at the end of July, but derivatives prices suggest traders believe the September meeting is more likely to kickstart easier monetary policy, according to LSEG.

(Source: Reuters)