April 16, 2024
The Federal Reserve has made substantial progress in reducing inflation from its high of 9.1% in mid-2022. But after falling to 3% in June 2023, the pace of inflation has picked up slightly, as headline consumer prices, measured by the Consumer Price Index (CPI), increased by 0.5% to an annual rate of 3.5% in March.
The recent uptick in inflation coupled with a resilient U.S. economy is likely to keep the Fed on hold for a bit longer. In fact, there has been a repricing of the number of Fed rate cuts for 2024, from six at the start of the year to a current projection of two. Since we have long been of the belief that the last mile of inflation could be challenging, we are not surprised the market has moved to our “less and later” rate-cut outlook.
While we believe it may take longer for inflation to reach the Fed’s 2% target, it will be worth watching the price of oil, which has been on the rise in the midst of recent geopolitical tensions. For now, interest rates are likely to remain higher for longer. Yet, if solid growth leads to improved earnings, as we expect, equities can still do well and bond investors will have another opportunity to lock into attractive yields.
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