Payden & Rygel: US CPI data - why rush to cut rates?
Payden & Rygel: US CPI data - why rush to cut rates?
Jeffrey Cleveland, Chief Economist at Payden & Rygel, comments on the US Consumer Price Index data.
We’re focused on the month to month reading in core CPI. Why? As mentioned by Powell during his testimony before Congress last week, the Fed would like to see not necessarily better but more monthly readings like we saw in the second half of last year before being confident enough to cut rates. As Powell explained, if the monthly readings register softer, eventually the annual readings will slow as well. Well, that didn’t happen with the core CPI in February. Core CPI increase 0.4% month to month—the same reading as in January.
Beneath the surface, the big drive of core CPI was shelter. But we can slice and dice the data differently. Services excluding rent rose 0.6% in February, the same reading as in January—so way too hot. The much vaunted “super core”—core services ex shelter—rose 0.5% in February. Again, way too spicy for us.
For the Fed, it looks to me like rate cuts are going to have to wait until perhaps later in the year. By the standard re-iterated by Powell last week, the Fed is looking for a continuation of the softer readings recorded in the second half of last year. We aren't seeing that to start 2024. If the Fed is trying to get more comfortable that inflation will move back sustainably to 2%, I don't see how the January and February core CPI readings help matters. I now look for the first cut in Q3, and just two cuts for the year.
As for the market's initial reaction (very little movement in bond yields) this morning--who knows?! It's possible that markets were positioned for a hotter print, but it's also likely investors are still digesting the implications: cuts arrive later and we end up with fewer in 2024.
Why rush to cut rates based on this data?