Hotter-than-expected inflation data Wednesday threw cold water on investors’ hopes that the Federal Reserve would begin cutting interest rates as early as June – sending the markets plunging.
All three major stock indexes veered sharply lower at the opening bell after the Labor Department’s Consumer Price Index for March was 3.5% – which comes on the heels of landing north of consensus in both January and February.
Consensus among traders is that the Fed will now hold off until September before it slashes rates from their current 23-year-high. They are also predicting there will be two cuts of 25 basis points instead of the three that had been projected this year.
“The stickiness of inflation data caused a ‘sell first ask questions later’ mentality,” said Ryan Detrick, chief market strategist at Carson Group in Omaha. “And that disappointment caused a push-back on not only the potential timing of the first rate cut but how many we’re going to get.”
The Dow Jones Industrial Average plummeted 422.16 points, or 1.1%, to 38,461.51 – its lowest in nearly two months. The S&P 500 lost 49.27 points, or 1%, to 5,160.64 and the Nasdaq dropped 136.28 points, or 0.8%, to 16,170.36. All three indexes were at or near record highs at the end of March.
The pessimism is further fueled by last Friday’s sizzling jobs report, which showed US employers increased their payrolls by a whopping 303,000 in March.
Historically, a strong job market keeps wages and consumer spending levels elevated.
Employers are also paying higher wages because of new minimum wage laws similar to the one that went into effect in California this month – while jacked-up prices for food, gas, rent and many other items have remained elevated since the surge that followed the pandemic.
The stubborn inflation complicates President Joe Biden’s claims to be making steady progress against higher prices. Biden had previously suggested that lower inflation would lead the Fed to cut rates, but he hedged that prediction on Wednesday.
“This may delay it a month or so,” Biden said at a news conference with Japanese Prime Minister Fumio Kishida, adding that he’s “not so sure” exactly what the Fed would do.
However, former Treasury Secretary Larry Summers told Bloomberg “there’s a meaningful chance – maybe 15% – that the next move is going to be upwards in rates, not downwards.”
Economists at Goldman Sachs, meanwhile, were more optimistic, forecasting the Fed will cut rates in July and again in November, according to Bloomberg.
The Fed will “need to see the string of three firmer inflation prints from January to March balanced by a longer series of softer prints in subsequent months,” the banking giant’s team of economists led by Jan Hatzius wrote in note.
The persistent inflation, which was supercharged in part by pandemic-era stimulus checks and other government spending, comes despite stocks adding $12 trillion in value since last October.
“Easy financial conditions continue to provide a significant tailwind to growth and inflation,” Apollo Global Management’s Torsten Slok told Bloomberg.
“We are sticking to our view that the Fed will not cut rates in 2024.”
With Post wires
