Raphael Bostic and Janet Yellen agree the current CPI outlook is positive, but markets should not hurry for rate cuts.
The recent report on the US Consumer Price Index (CPI) sent shockwaves across American markets. Many analysts now expect the Federal Reserve to start cutting rates later this year, perhaps even after the summer.
US inflation cooled more than expected in January, falling to 3.1% instead of the 2.9% expected. Treasury Secretary Janet Yellen, who is traveling across the nation to promote Biden’s economic plan, downplayed the worse-than-expected data.
“The recession that many forecasters predicted we would need, to see inflation come down, hasn’t materialized," she said in Pittsburgh hours after the CPI release. Yellen also said they made significant progress toward lower prices, with key sectors like energy and food following market lines.
Indeed, the American economy grew more than expected in the last quarter of 2023. US Gross Domestic Product increased by 3.3%, compared to the 1.5% widely expected. Atlanta’s Fed expects GDP to grow by 2.9% in the first quarter of 2024.
The US economy outpaced its biggest economic rival, China, in Q3 last year.
Unemployment also shows positive developments, remaining at historic lows for much of 2023. In January, unemployment came down to 3.7%.
All of this on the backdrop of high interest rates by the Federal Reserve. The Fed brought rates to 5.25% and kept them steady since September 2023. Many now wonder when will the Fed cut rates, but analysts and insiders alike agree it won’t be soon.
Bostic: inflation will decline more slowly
The President of the Federal Reserve of Atlanta Raphael Bostic believes inflation will inexorably come down, but slower than markets expect. “i” said Bostic, “says that victory is not clearly in hand, and leaves me not yet comfortable that inflation is inexorably declining to our 2% objective.”
However, Bostic is not confident enough that consumer prices are on a clear path to the target. This, he fears, will hamper future rate cuts.
At the beginning of the year, markets were pricing in cuts already in March. This is now considered extremely unlikely, with June cuts also improbable.
But this is not necessarily bad news, according to Bostic. “Right now, a strong labor market and macroeconomy offer the chance to execute these policy decisions without oppressive urgency,” he said.
The only issue could arise if markets expect earlier cuts. The S&P 500 recently broke historic highs, widely forecasting a June cut. If such a cut did not occur, the overvalued stocks on the S&P 500 may explode into a bubble.
