By Sam Goldfarb and Nick Timiraos
Stubborn inflation pressures persisted in March, derailing the case for the Federal Reserve to begin reducing interest rates in June and raising questions over whether it can deliver cuts this year without signs of an economic slowdown.
The consumer-price index, a measure of goods and services prices across the economy, rose 3.5% in March from a year earlier, the Labor Department said Wednesday. That was a touch higher than economists had forecast and a pickup from February’s 3.2%. So-called core prices, which exclude volatile food and energy categories, also rose more than expected on a monthly and annual basis.
Stocks fell, with the Dow Jones Industrial Average down more than 400 points to its lowest close in nearly two months. Yields climbed on U.S. government bonds, reflecting bets that the data could help delay and diminish future interest-rate reductions.
The yield on the benchmark 10-year Treasury note settled at 4.559%, marking its highest close since November and its largest single-day increase since September 2022. An auction of 10-year Treasury notes on Wednesday afternoon was met by soft demand, with the weakest participation from investors since November 2022, according to BMO Capital Markets.
Futures contracts tied to the federal-funds rate show traders see rates ending the year around 5%, according to FactSet, implying just one or two quarter-point cuts this year. Entering January, traders had expected the Fed to cut interest rates six or seven times.
“Inflationary pressures remain firm across the board,” said Blerina Uruçi, chief U.S. economist at T. Rowe Price’s fixed-income division. Inflation overall is “firmer than the Fed needs it to be to initiate a series of interest rate cuts anytime soon.”
President Biden, who last month said he thought the Fed would cut interest rates later this year, said he stood by that prediction Wednesday but said the latest inflation numbers might delay the cut by a month or so. “We don’t know what the Fed is going to do for certain,” he said during a press conference.
March is a moment
Wednesday’s report had been hotly anticipated because Fed leaders had been willing to play down stronger-than-anticipated inflation readings in January and February as reflecting potential seasonal quirks. But a third straight month of above-expectations inflation data erodes that story and could lead Fed officials to postpone anticipated rate cuts until July or later.
Fed officials have been optimistic about achieving a so-called soft landing in which inflation slows without a sharp downturn in economic activity. To do that, some officials wanted to cut rates pre-emptively before the economy weakens notably. The latest report sets back that effort by depriving them of a credible justification for cutting rates, and it could prompt them to hold rates at their current level, the highest in 23 years, until they see more cracks in the economy.Wages and prices, change from a year earlierSource: Labor DepartmentNotes: Consumer-price data aren’t seasonally adjusted; wage data are average earnings for all privateworkers and are seasonally adjusted.
Details within the report were just as concerning as the headline numbers, analysts said. The overall core index climbed 0.4% from the previous month despite a decline in the prices of goods such as new and used cars and trucks. A problem area was services outside of housing. That category, which includes everything from car insurance to medical care, has been flagged by Fed officials as particularly important because it can be sticky and closely linked to strength of the labor market.
The cost of shelter also increased 0.4% from February, continuing to defy predictions that it would start rising more slowly given private-sector indexes that have shown a marked slowdown in new rents.
Last month, a narrow majority of Fed officials thought at least three cuts would be warranted this year if inflation continued to fall. Fed Chair Jerome Powell has suggested he is on his front foot ready to cut rates but that the central bank shouldn’t be in a rush to do so.
“We’re in a situation where if we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment,” Powell said last month. “We do see the risks as two-sided, so it is consequential” to start cutting rates.
Before Wednesday, many economists had also remained optimistic that inflation would resume its decline in March. But the latest data prompted some to push back the timing and magnitude of expected Fed cuts. Economists at Goldman Sachs and UBS, who previously anticipated three cuts this year starting in June, now anticipate two cuts this year starting in July and September, respectively.
The last mile
Wednesday’s CPI report won’t be the final word on what prices did last month. The Fed’s preferred gauge, to be released later this month by the Commerce Department, has been running below the CPI. Core inflation using that measure was 2.8% in February.
By all measures, inflation has eased substantially since its peak in mid-2022, when CPI data showed that prices had climbed roughly 9% from a year earlier.
But Wednesday’s report reignited fears that the proverbial “last mile” of the inflation fight will be challenging. For example, core CPI had declined on a 12-month basis in every month since March 2023, when it stood at 5.6%, but that streak was broken with the latest price data.
“The key risk is not that inflation might rise…but rather that inflation will stall out and fail to follow the forecast path all the way back to 2% in a timely way,” said Dallas Fed President Lorie Logan last week. “In light of these risks, I believe it’s much too soon to think about cutting interest rates.”
Surveys suggest that Americans remain frustrated by the cost of living. Indexes of consumer sentiment have gradually improved but remain well below prepandemic levels. A recent Wall Street Journal poll of voters in seven of the most competitive states in the 2024 election found that 74% thought that inflation had moved in the wrong direction over the past year.