Expectations of central bank cuts are fading rapidly
Leading banks are scaling back expectations for Federal Reserve interest rate cuts – and a hike might be its next move if inflation pressures remain, a top central bank official has said.
The Federal Reserve Bank of Cleveland president Beth Hammack indicated in an Associated Press interview that she would prefer to see the funds rate hold steady, but envisaged either a rate increase or cut ahead depending on the outlook for inflation and jobs.
“I can foresee scenarios where we would need to reduce rates… if the labor market deteriorates significantly,” she said. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”
In recent days, expectations of a 2026 cut by the central bank have faded amid rising fears that the ongoing war in Iran will inflame oil prices and inflation further.
Citigroup and Wells Fargo both see a Fed rate reduction as less likely in the near future, with the latter now expecting no cuts at all by the central bank this year.
And in a joint interview for The Indicator from Planet Money podcast, Hammack and Chicago Fed president Austan Goolsbee suggested on a scale of green (good) to red (bad), inflation was currently flashing “orange” and getting worse.
“At least orange. Orange with a chance of meatballs. It hasn’t been great,” Goolsbee said. “I was optimistic that we would get back to this path to 2% inflation, but yikes, it’s going from orange to red lately.
“We had tariffs increasing prices. That was supposed to go away, kind of didn’t go away, and now we add another stagflationary shock on top.”
Next inflation reading a crucial gauge for central bank
This week will see the release of some important data for the Fed as it weighs its next steps, with the Bureau of Labor Statistics set to reveal the consumer price index (CPI) for the month of March on Friday (April 10).
Financial markets will be closely watching that data to see if the ongoing conflict in the Middle East has stoked the US’s inflation rate, which last came in at 2.4% in February, down from 3% in September. Experts expect that rate will be higher this time around: data provider FactSet says economists are predicting a 3.1% CPI for March.
The crisis has already sent bond yields climbing, putting upward pressure on mortgage rates. The benchmark 30-year fixed mortgage rate averaged 6.46% as of April 2, according to Freddie Mac, as long-term borrowing costs remained above 6% for the fifth week in a row.
Fed decisionmakers will be keeping a close eye on this week’s inflation numbers – and Hammack sounded an ominous note to the AP on the overall price outlook.
“Inflation has been running above our target for more than five years now,” she highlighted. Another jump, put simply, would mean it’s “moving in the wrong direction – away from our 2% objective.”
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