US January CPI Exceeds Expectations, Dampening Rate Cut Expectations from the Fed. However, Chicago Federal Reserve Bank President Austan Goolsbee reassured the market yesterday, emphasizing that there is no need for an excessive reaction and that interest rates do not need to be cut only when the inflation rate falls to 2%.
US Bureau of Labor Statistics released the January Consumer Price Index (CPI) this Tuesday (13th).
The data shows that the year-on-year increase in US CPI in January was 3.1%, higher than the market’s expectation of 2.9%. This has almost eliminated the possibility of a rate cut by the Federal Reserve in March and pushed back the timing of the first rate cut to June or later.
However, Chicago Federal Reserve Bank President Austan Goolsbee calmed the market on the 14th. During a speech at the Council on Foreign Relations in New York, he emphasized that even if price increases in the coming months are slightly higher than expected, the Fed’s path to returning to its 2% inflation target remains on track.
Goolsbee emphasized not to judge inflation trends based on one month’s data. The Fed’s 2% target is based on the Personal Consumption Expenditures (PCE) price index, not CPI, and these two indicators may have “some degree of significant difference”.
Goolsbee also mentioned that he does not support waiting for the inflation rate to drop to 2% before starting to cut rates. The Fed’s current policy stance is “quite limited”. He emphasized the importance of productivity growth to the economy and the Fed’s decision-making process, and indicated that inflation expectations are still within a “controlled range”, which is evidence of the Fed’s credibility.
Former Fed economist urges faster rate cuts
Another person who shares the same stance as Goolsbee is former Fed economist and founder of Sahm Advisory Company, Claudia Sahm. He recently wrote an analysis stating that the higher-than-expected increase in US CPI in January was mainly due to rising housing costs.
Although returning to a low inflation path is currently challenging, it would bring greater impact on other sectors of the economy and financial markets, which the Fed must avoid making mistakes this year.
Sahm mentioned that the Fed is considering rate cuts against the backdrop of a strong economy. Some people believe that the Fed should not cut rates under strong economic growth, but there are real risks at present, with rising interest rates putting pressure on the real estate market, credit market, and banks.
Several Fed officials have previously stated that the worst possible outcome would be for the Fed to start cutting rates but then have to raise them again after inflation rebounds. However, Claudia Sahm finds this concern strange. Now is not the time for the Fed to delay rate cuts but rather the time for the Fed to step aside.
US stocks rise across the board
While Austan Goolsbee was reassuring the market or perhaps due to his remarks, all four major US stock indices rose on the 14th:
The Dow Jones Industrial Average rose 151.52 points, or 0.4%, to close at 38,424.27 points.
The Nasdaq Composite Index rose 203.55 points, or 1.3%, to close at 15,859.15 points.
The S&P 500 Index rose 47.45 points, or 0.96%, to close at 5,000.62 points.
The Philadelphia Semiconductor Index rose 97.23 points, or 2.18%, to close at 4,565.41 points.