According to the latest data, U.S. core CPI in February was higher than expected for the second consecutive month. Although this is not what the Fed wants to see, most Wall Street analysts believe it will not affect the Fed's expectations of starting to cut interest rates in the second half of the year. Although some analysts said that the February inflation data was not good news for the Federal Reserve and the Biden administration, they generally believed that the high growth in inflation data would not last long.
Some analysts pointed out that core CPI increased by 0.4% month-on-month for the second consecutive month in February, indicating that January's data was not a one-time anomaly. However, headline inflation still looks stubborn. Fitch Ratings chief economist said this was not in line with the Fed's expectations. Bloomberg analysts believe that the February report shows that inflation remains stubborn, making Fed officials wary of easing policy prematurely.
However, some analysts hold a different view. Charles Schwab strategists said the February inflation data may be seen as a reason to keep monetary policy on hold for longer. They believe that after volatility, the downward trend in inflation appears to be stabilizing, and the Fed wants to see it continue to decline before cutting interest rates. In contrast, analysts at LH Meyer/Monetary Policy Analytics believe that CPI is slightly higher than expected, but not high enough to prevent the Federal Reserve from cutting interest rates as expected in June.
Markets are also divided on their interpretation of the inflation data. Some analysts believe that the interest rate market seems to be prepared for worse inflation data, but they do not believe that the current data supports a continued rebound in inflation levels. UBS analysts believe that although the February inflation report was strong, it indicated that January's high growth is unlikely to continue into the spring, and today's report is unlikely to have any impact on the upcoming FOMC meeting.
The market has three more reports to confirm or reverse expectations for a rate cut ahead of the crucial June meeting. For now, Wall Street remains confident, but that could change if future data doesn't improve. Investors remain optimistic that housing costs will fall, but it's the overall downward path of inflation that matters.
Taken together, although February's inflation data was higher than expected, Wall Street analysts generally believe that this will not prevent the Federal Reserve from starting to cut interest rates in the second half of the year. However, the market is divided on the interpretation of inflation data, and future data will have an impact on interest rate cut expectations.
