US First-Quarter Economic Growth Slows Significantly, Inflation Pressure Intensifies, Diminishing Market Expectations for Fed Rate Cuts
In an article written by Nick Timiraos, a journalist for The Wall Street Journal, he expressed that the Fed’s rate-cutting dreams for this year are gradually fading. The latest economic data released by the US Department of Commerce on the 25th showed that the initial estimate of the annualized GDP growth rate for the first quarter of this year was only 1.6%, while the core personal consumption expenditure (PCE) price index increased by 3.7% year-on-year, reaching its highest growth rate in a year, surpassing market expectations. This indicates unexpected weakness in economic growth coupled with persistent high inflation.
The article points out that although individual economic growth and price index data so far are not sufficient to significantly change the Fed’s decision-making prospects, the cumulative effect of a series of disappointing data is quite significant. In particular, the inflation data has consistently exceeded expectations, and the recent months’ data have been revised upwards in subsequent reports. This trend has caused investors and officials to begin reconsidering whether rate cuts this year are appropriate.
Regarding the prospects of rate cuts, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, stated last week that the US Department of Commerce would release the PCE price index for personal consumption on Friday, and the data on Thursday indicated that the inflation data for January and February may have been revised upward from the already strong levels. Inflation may not have slowed down in March, but instead may have increased, maintaining the inflation rate at around 2.8% over the past 12 months.
The Fed’s inflation target is 2%. Since the end of last year, officials have repeatedly hinted at the possibility of starting rate cuts because the expected increase in prices later this year is expected to slow to around 2.5% and then further decrease to 2%. In the third and fourth quarters of last year, the annual growth rate of the core PCE index remained at 2%, which supported the market’s optimistic expectations that the Fed had successfully fought against inflation.
Kevin Burgett, an analyst at LH Meyer, initially predicted that the Fed would start rate cuts in June and cut rates three times this year. He then adjusted the forecast to rate cuts starting in September and only twice this year. However, after the release of the US first-quarter economic data, he now predicts that the Fed will only cut rates once at the December meeting.
Burgett wrote in a report to clients on Thursday that the market generally agrees with this view. At the beginning of the year, investors in the interest rate futures market expected six rate cuts, but now many expect only one rate cut or no rate cuts at all. Bond investors sold US treasuries on Thursday, causing the yield on 10-year treasuries to soar above 4.7%, the highest level since November last year when Fed officials had not yet indicated that they would stop raising interest rates.
The Federal Reserve has been paying special attention to monthly inflation data recently, partly because since the pandemic, both central bank economists and the wider economic community have found it difficult to predict inflation. Many people failed to predict the magnitude of the increase in inflation in 2021 and 2022 and were then surprised by the decline in inflation rates last year despite strong hiring and spending.