The following is (in brief) from Westpac, with analysts seeing challenges ahead for the US economy that could bring shorter-term rate cuts back to the table:
- Market reaction to the March U.S. CPI report suggests participants continue to place a much higher weight on inflation risks than on activity. Service inflation is the reason. While many in the market say this is due to a strong job market and strong wage growth, the data increasingly does not support this view.
- Services inflation is no longer driven by sub-components of the CPI linked to discretionary demand. Rather, current services inflation is a legacy of high goods inflation during the pandemic and capacity constraints.
- Just as the market has become overly optimistic about the prospects for interest rate cuts at the end of 2023, participants are now arguably underestimating the support the U.S. economy will need through the end of the year and in 2025.
I think there’s something there. And I would add that with the US elections in November approaching, a rate cut in September is not excluded. Yes (I already said it), the Fed is independent, but not THAT independent 🙂
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