MacroResearchBoard

Has The Window For Lower U.S. Policy Rates Closed? – April 15, 2024

A just-published report examined the deteriorating outlook for U.S. inflation. Last year’s steady deceleration has given way to a meaningful rebound in underlying inflation, based on the last three CPI reports.

Our analysis showed that inflation’s recent pickup cannot be solely pinned on one-off/reversible factors, and underscored our view that the underlying trend of U.S. inflation is much firmer than the Fed or bond bulls perceive. Inflation will remain sticky and well above the Fed’s target for the foreseeable future, and an unwarranted policy easing cycle will only yield additional upside surprises to future inflation.

The Fed is still determined to ease, and monthly fluctuations in upcoming inflation reports may yet give it room to cut the policy rate, albeit only one or at most two times this year before it will likely have to stop. The forward markets had been pricing in an aggressive easing cycle in 2024-2025, but expectations have meaningfully tempered so far in 2024 and a further unwinding is probable. In turn, even higher bond yields loom.