The
Bureau
of
Labor
Statistics
reported
that
the
Consumer
Price
Index
rose
3.5%
in
March
from
year-ago
levels,
well
above
forecasts
for
a
3.4%
increase
and
a
jump
from
February’s
3.2%
inflation
rate.
In
the
bond
market,
expectations
now
centre
on
the
Fed
making
its
first
cut
in
the
federal-funds
rate
in
September.
Before
Wednesday’s
CPI
report,
the
average
expectation
was
that
the
central
bank
would
lower
rates
by
a
quarter
of
a
percentage
point
in
June
from
the
current
target
range
of
5.25%-5.50%.
In
contrast,
at
the
start
of
this
year,
the
Fed
had
been
expected
to
start
cutting
rates
in
March.
“In
one
word,
the
report
was
discouraging
for
the
Fed
and
the
prospects
of
a
June
cut.
Inflation
is
proving
sticky,”
Bank
of
America
economists
wrote
Wednesday
morning.
Fed
Rate
Cuts
Hinge
on
Inflation
Outlook
With
the
economy
continuing
to
grow
at
a
healthy
pace,
the
Fed’s
ability
to
start
cutting
rates
has
been
seen
as
heavily
dependent
on
continued
progress
in
reducing
inflation
after
upward
pressure
on
prices
hit
a
40-year
peak
in
2022.
The
higher-than-predicted
inflation
reading
for
March
followed
above-forecast
CPI
reports
in
January
and
February,
fuelling
worries
that
the
progress
seen
in
reducing
inflation
during
2023
has
stalled
out.
With
Fed
officials
emphasising
the
need
to
feel
comfortable
with
the
inflation
outlook
before
beginning
to
lower
rates,
the
bond
market
reacted
sharply
to
Wednesday’s
CPI
report.
When
Will
the
Fed
Cut
Rates?
In
the
futures
market,
where
bond
traders
place
bets
on
the
direction
of
interest
rates,
odds
that
the
Fed
will
cut
rates
at
its
June
policy-setting
meeting
plunged
from
56%
on
Tuesday
to
just
under
19%
following
the
CPI
report,
according
to
the CME
FedWatch
Tool.
Bond
traders
also
now
predict
that
the
Fed
will
hold
rates
steady
even
at
its
July
meeting.
The
first
rate
cut
is
now
seen
as
more
likely
to
come
in
September.
Bond
traders
peg
the
odds
of
the
Fed
lowering
the
funds
rate
to
a
5.00%-5.25%
target
at
46%,
compared
with
32%
odds
of
rates
still
being
at
current
levels
and
a
20%
chance
of
rates
being
cut
by
half
a
point.
Pimco
economist
Tiffany
Wilding,
wrote:
“In
addition
to
the jobs
report
released
last
week,
[the
March
CPI
report]
complicates
the
timing
of
the
Fed’s
rate
cuts.
With
this
latest
data,
there
is
a
strong
case
to
push
out
the
timing
of
the
first
cut
past
mid-year.”
Expectations
for
the
number
of
rate
cuts
in
2024
have
also
changed
dramatically.
Coming
into
the
year,
investors
were
anticipating
five
cuts
starting
in
March.
That
has
now
been
scaled
back
to
slightly
favouring
two
cuts,
with
a
target
range
of
4.75%-5.00%
to
close
out
the
year.
Bond
traders
still
see
a
more
than
30%
chance
that
only
one
cut
will
be
in
the
offering
in
2024.
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