Wednesday’s better-than-expected inflation numbers poured cold water on investors’ hopes that the Federal Reserve would start cutting interest rates as early as June, sending markets plummeting.
All three major stock indexes fell sharply at the opening bell after the Labor Department announced that the consumer price index for March was 3.5%. This came on the heels of below-consensus levels in both January and February.
The consensus among traders is that the Fed will hold off on cutting interest rates from current 23-year highs until September. The bank also expects two 25-basis point rate cuts this year, rather than the three expected.
“The persistence of inflation statistics has created a ‘sell first, ask questions later’ mentality,” said Ryan Detrick, chief market strategist at Carson Group in Omaha. “And that disappointment caused a setback not only in the potential timing of the first rate cut, but also in the amount of the rate cut.”
The Dow Jones Industrial Average fell 422.16 points, or 1.1%, to $38,461.51, its lowest level in nearly two months. The S&P 500 Index fell 49.27 points, or 1%, to 5,160.64, and the Nasdaq Index fell 136.28 points, or 0.8%, to 16,170.36. At the end of March, all three indexes were at or near record highs.
The pessimism was further fueled by last Friday’s torrid jobs report, which showed U.S. employers increased payroll costs by a whopping 303,000 jobs in March.
Historically, a strong job market continues to drive wages and consumer spending levels higher.
Employers are also paying higher wages thanks to a new minimum wage law similar to the one that took effect this month in California, but markup prices for food, gasoline, rent and many other items are still rising since the post-pandemic hike. It remains as it is. .
Stubborn inflation complicates President Joe Biden’s claims of steady progress against rising prices. Biden had previously suggested that lower inflation would lead to a Fed rate cut, but he hedged that prediction on Wednesday.
“This could delay it by about a month,” Biden said at a press conference with Prime Minister Fumio Kishida, adding that he was “not sure” what exactly the Fed would do.
But former Treasury Secretary Larry Summers told Bloomberg: “There’s a good chance that the next move will not be to cut rates, but to raise them – perhaps by 15%.”
Economists at Goldman Sachs, meanwhile, are more optimistic, predicting the Fed will cut rates in July and again in November, according to Bloomberg.
The Fed “needs to ensure that the three rounds of strong inflation developments from January to March are balanced out by a prolonged series of soft developments in subsequent months,” the bank, led by Jan Hadzius, said in a statement. a team of leading economists wrote in a memo.
Inflation, fueled in part by pandemic-era stimulus and other government spending, has persisted even as stocks have added $12 trillion in value since last October.
“Easy financial conditions continue to provide significant tailwinds for growth and inflation,” Thorsten Slok of Apollo Global Management told Bloomberg.
“We stand by our view that the Fed will not cut rates in 2024.”
with post wire
