"New Fed News Agency" issued an urgent article: Tonight will decide when the Fed will cut interest rates!
Since the first surge in inflation three years ago, the US CPI report has become one of the most closely watched reports in the market, and the March CPI data released on Wednesday is of particular significance: because Fed officials seem willing to ignore the stronger-than-expected inflation data in January and February.
Nick Timiraos, a reporter for the Wall Street Journal, known as the "New Fed News Agency", pointed out that given the Fed officials' underreaction to the inflation data in January and February, the hot inflation data in March may cause the Fed to "overreact". Although some Wall Street analysts tend to "exaggerate", an interest rate strategist said that this is understandable, after all, the March CPI data is "one of the most critical US data recently".
To understand why, it is worth looking at how Fed Chairman Powell described the stronger CPI data in January and February, and how he pointed out that the decision to cut interest rates will be "far-reaching".
At a press conference last month, Powell acknowledged that CPI data for the first two months of 2024 broke a series of significant slowdowns in inflation that began in June 2023.
Powell warned against simply revising the entire inflation outlook based on two reports, and that stronger inflation increases in January and February may be partly due to seasonal factors.
But he also noted that the Fed's willingness to under-react to stronger inflation is limited, and the March CPI report may test the limits of that willingness. Powell said at the time:
"We said it was going to be a bumpy ride. Now, there are some bumps here, and the question is, are they more than just bumps? We can't know that."
The Fed has tried to avoid making policy based on one or two data points, but the resilience of economic activity so far this year means that the case for a mid-year rate cut depends on whether inflation can resume the steady downward trend since the second half of last year.
Powell has said he may support a rate cut earlier than some of his colleagues to avoid accidentally triggering a recession, but he also said officials need a credible reason to start cutting rates. "History shows that you need to try to get it right the first time so that you don't have to raise rates again."
Timiraos said that if the data shows that U.S. inflation was mild in March and April, the Fed may cut interest rates in June. But if the March data shows that the anti-inflation process has been frustrated again, this may disrupt the Fed's plan to cut interest rates in June and postpone the first rate cut to July or even later.
Another reason why the March CPI data is important is that this will be the last CPI data the Fed will get before the next interest rate meeting. The PCE price index will be released on April 26. Although officials may keep interest rates stable at the May interest rate meeting, the inflation data may have an important impact on what actions they take at the June meeting, such as how Powell and his colleagues set the criteria for a June rate cut in their communication next month.
Timiraos concluded that all of this makes the March inflation report the most watched economic report in the near future until next month.
