Higher-than-expected inflation in March helped verify worries that inflation is proving stickier than thought.
"The math suggests it's going to be hard near term to get inflation down to the Fed's target," said Liz Ann Sonders, chief investment strategist at Charles Schwab. "Not that you've put a pin in inflation getting to the Fed's target, but it's not happening imminently."Both the all-items and ex-food and energy readings were higher than the market consensus on both a monthly and annual basis, putting the rate of inflation well above the Fed's target.
All of that leaves the Fed in a holding position and the markets worried about the possibility of no cuts this year., which computes rate-cut probabilities as indicated by futures market pricing, moved dramatically following the CPI release. Traders now see just a slim chance of a cut at the June meeting, which previously had been favored. They have also pushed out the first reduction to September, and now expect only two cuts by the end of the year.
However, "inflation will remain higher than what is necessary to warrant Fed easing," he added. "In this regard, Fed cuts will be pushed out to into the second half of the year and are likely to fall only 50 basis points with risks being tilted in the direction of even less easing."The pricing in of seven rate cuts earlier this year was completely at odds with indications from Fed officials.