Fresh evidence of sticky inflation released Thursday will likely reinforce the Federal Reserve’s cautious approach to rate cuts and could add to questions about whether interest rates will remain elevated for longer than expected in 2024.
"Given the stickier than expected nature of inflation, it’s going to be very difficult for the Fed to justify a near-term rate reduction," Stifel's Lindsey Piegza told Yahoo Finance Live Thursday. "Our base case is that the Fed holds off to the second half of the year before initiating a change in policy."
The new inflation reading Thursday came from the Labor Department’s Producer Price Index, which tracks the prices businesses pay to manufacture products and services.
The index rose 0.6% from January to February, up from a 0.3% rise the previous month. So-called "core" producer prices, excluding volatile food and energy costs, were up 0.3% month-over-month. The Fed watches core prices closely.
While that core figure was an improvement from the prior month, it was higher than the 0.2% expectation. Compared with a year ago, core prices climbed 2%, which was the same as last month but also more than expected.
The odds of a first rate cut in June slipped slightly following the PPI release Thursday, from 67% to 63%, according to Fed Funds Futures.
That June percentage was considerably higher several weeks ago, underscoring the shifting expectations on the part of investors as signs of elevated inflation persist. Traders began the year expecting a first cut in March.
One former Fed official said the new PPI figure probably won't change the big picture for the Fed as inflation continues to come down when compared to highs achieved in 2022.
"A little bit hot on the PPI today," said Jim Bullard, former president of the St. Louis Fed and now dean of the Purdue Business School, "but one number like this probably wouldn't affect things dramatically."
The hotter-than-expected producer prices follow a Tuesday release of the Consumer Price Index showing that "core" consumer prices in February climbed 3.8% over the prior year, which was also higher than economist expectations.
Fed chair Jay Powell and his colleagues have been emphasizing for months that they want to be sure inflation is moving "sustainably" down to their 2% target before easing monetary policy.
The Fed is widely expected to hold the benchmark policy rate steady at its meeting next week in the range of 5.25%-5.5%.
Officials will also release updated interest rate projections as part of a so-called dot plot, and there is a chance some could scale back the number of expected cuts this year given the stickier inflation data.
They estimated three cuts for 2024 in their last dot plot released in December.
"This does leave a degree of uncertainty as to when they cut first and what they’ll do on the dot plot," said Wil Stith, bond portfolio manager for Wilmington Trust.
"Will they leave it at three cuts or will they change that?"
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