'This Puts The Fed In Quite A Tricky Position': 7 Economists Weigh In On March Inflation Report

Inflation flares up once more, scorching investors’ confidence and dashing hopes of imminent rate cuts as the latest Consumer Price Index (CPI) report surpasses expectations in March.

While the headline annual inflation rate unexpectedly surges from 3.2% to 3.5%, primarily driven by increasing gasoline prices, the core inflation gauge, which excludes volatile energy and food items, also surpasses estimates, registering at 3.8%.

These inflation readings have prompted traders to reassess their expectations for Federal Reserve interest rate cuts.

Market-implied probabilities for a June rate cut have plummeted from 54% prior to the release to a mere 20%, according to the CME Group FedWatch tool. A rate cut is now more likely to occur only by September, with markets pricing in fewer than two cuts by year-end.

Stocks fell across the board in response to the inflation data, with the SPDR S&P 500 ETF Trust SPY down 0.9%. Small caps and real estate stocks were the hardest hit, with the iShares Russell 2000 ETF IWM and the Real Estate Select Sector SPDR Fund XLRE, down 2% and 3.5%, respectively.

Yields on 2-year Treasury notes skyrocketed to 4.95%, up by nearly 20 basis points, marking the highest 1-day increase in more than a year.

Chart: 2-Year Treasury Yields Spike On Hot Inflation Surprise

Here are the reactions from 8 prominent economists or market experts to the March inflation report.

Goldilocks Left The Building

“Goldilocks has left the building – inflation isn't coming down anymore and rate cut hopes are going to be pushed off even further into the future,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, says.

According to Zaccarelli, the Federal Reserve can overlook a single report, but with consecutive reports showing higher-than-expected figures, it becomes increasingly challenging for policymakers to justify imminent rate cuts.

While the expert maintains that the Fed still leans towards rate cuts, he anticipates a potential reduction of 25 basis points in either July or September. However, if inflation data continues to remain stubbornly high, this could potentially be the sole rate cut for the year.

Affordability Gets Worse; Markets Price Less Than 2 Fed Rate Cuts

The Kobeissi Letter highlights the concerning trend of inflationary pressures extending beyond the headline Consumer Price Index (CPI) figure of 3.5%. Various essential goods and services are experiencing significantly higher inflation rates, underscoring the strain on consumers’ budgets:

1. Car Insurance Inflation: 22.2%
2. Transportation Inflation: 10.7%
3. Car Repair Inflation: 8.2%
4. Hospital Services Inflation: 7.5%
5. Homeowner Inflation: 5.9%
6. Rent Inflation: 5.7%
7. Electricity Inflation: 5.0%
8. Food Away From Home Inflation: 4.2%

Both core CPI and headline CPI figures have consistently exceeded expectations for the fourth consecutive month. This trend is compounded by the resurgence in oil prices, nearing $90 per barrel, exacerbating concerns about affordability and the overall cost of living.

“The market is now pricing less than two Federal Reserve cuts this year as it takes another step in the later and fewer direction for the excessively dependent Fed,” wrote Mohamed A. El-Erian, chief economic adviser at Allianz, on social media X.

“All this puts the Fed in quite a tricky position — one in which it should take a holistic view of what’s ahead for the economy as a whole,” he adds.

‘Nothing To See Here’

Robin Brooks, former IMF chief economist, said that the “underlying inflation is well very behaved in the March data.”

The economist still believes “we’re on the tail-end of start-of-year price resets now,” as inflation will sharply decline next month.

The Longest Period Since 1990 With Inflation Above 3%

Charlie Bilello highlights a negative economic milestone: the United States has experienced inflation rates exceeding 3% for 36 consecutive months, marking the longest period of sustained high inflation since the late 1980s and early 1990s.

In light of this prolonged inflationary environment, he believes there is a lack of data to justify a rate cut by the Federal Reserve in June.

Bilello emphasizes the importance for the Fed to maintain its current stance rather than opting for further rate reductions.

Cutting Ahead Presidential Elections Or Going Back To Rate Hikes?

Larry Tentarelli, president and founder of the Blue Chip Daily Trend Report, suggests that despite the incoming inflation data not explicitly supporting a rate cut, the upcoming presidential election year may influence the Federal Reserve’s decision-making process.

“The downside of keeping rates too high for too long is that it could eventually show up in the economy, as a slowdown or higher unemployment, or in the equity markets, which we think the Fed will want to avoid this close to an election,” Tentarelli says.

Skyler Weinand, chief investment officer at Regan Capital, indicates that central bankers are growing concerned about the possibility of inflation accelerating and may seek to address it by maintaining rates at their current levels for an extended period, or even thinking about new rate hikes.

“While investors are strictly focused on rate cuts, we remind investors that rate hikes should not be dismissed and are a reasonable possibility,” Weinand stated.

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Image created using a photo from the Federal Reserve and Midjourney.