Fed might not cut interest rates this week according to sudden expectations
Surging energy prices Monday helped add to sentiment that the Federal Reserve suddenly might not be in such a hurry to cut interest rates.
While markets still see the central bank lowering its benchmark overnight lending rate by a quarter point at this week’s Federal Open Market Committee meeting, the case for continued cuts seemingly has gotten weaker. Traders in the fed funds futures market on Monday were pricing in a 34% chance that the Fed will stay put on rates; the probability was zero a month ago and just 5.4% a week ago, according to the CME.
That came amid some changing economic trends as well as inflation pressures caused by a 14% jump in oil prices. Rising inflation makes the Fed more likely to tighten policy or at least hold the line rather than to cut rates.
“While the push-through of inflation from oil prices to core prices is small, the jump in overall prices, in combination with signs that core inflation is already heating up, may make it more difficult for the Fed to cut rates further,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings. “They had a cushion to fall back on with lower inflation — they could cut rates given inflation was low. Has the cushion been removed?”
Stronger economic data recently, featuring increases in consumer and business confidence as well as retail sales, has helped fuel some of the dovish sentiment. Some halting signs of easing tensions in the U.S.-China tariff battle also contributed.
And the firming inflation trend, such as the 2.4% annual rise in consumer prices, plus the likely boost from oil prices, complete a picture where Fed Chairman Jerome Powell at least could reiterate his position that this is a “mid-cycle adjustment” and not part of a longer easing trend.