Central Banks Rethink Rate Cuts as Inflation Sticks
The market has long anticipated interest rate cuts from major central banks towards the end of 2023. However, some economists are reassessing this expectation due to persistent core inflation, tight labor markets, and the surprisingly resilient global economy. The Federal Reserve faces a dilemma as stronger-than-expected U.S. jobs figures and gross domestic product data raise concerns about the potential withdrawal of monetary stimulus. Economic resilience and a tight labor market could exert upward pressure on wages and inflation, risking its entrenchment. Although the headline U.S. consumer price index has cooled since its peak in June 2022, dropping to 4.9% in April, it remains well above the Fed’s 2% target. Of significance, core CPI, which excludes volatile food and energy prices, increased by 5.5% annually in April.
While the Fed indicated a likely pause in its hiking cycle at the June meeting, minutes from the previous gathering revealed diverging views among members. Some still advocate for additional rate increases, while others anticipate a slowdown in growth that would remove the need for further tightening. St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari have suggested that sticky core inflation may keep monetary policy tighter for longer, hinting at the possibility of more rate hikes later in the year. As inflation proves stickier than anticipated, traders are betting on further interest rate hikes to combat rising prices. Deutsche Bank, for example, revised its terminal rate forecast to 5.25% and suggested that the Bank of England may need to push rates higher and further than previously intended. While economists expect rates to rise for a more extended period, many still anticipate a full reversal of course before the end of the year, considering uncertain effects and variable lags associated with policy changes. What do you think about interest rates? And where do you think the fed could improve?
Want to learn how to invest? Download the Invstr app, where you can play Fantasy Finance and manage a virtual investment portfolio or open a brokerage account and invest for real. Take our interactive investing course on Invstr Academy and become a better investor today!
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
