© Reuters. FILE PHOTO: The Federal Reserve building in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo
(Reuters) – Federal Reserve policymakers got fresh validation on Friday for their wait-and-see approach to interest rate cuts this year, after a government report showed wholesale prices rose far more than expected last month.
The 0.5% month-on-month increase in January’s core producer price index is likely to feed into a higher January reading for the Fed’s preferred measure for inflation due out at the end of this month, economists said, and keep the Fed on hold for longer.
Analysts at Citi calculated the core personal consumption expenditures price index will re-accelerate to 2.4% on a six-month basis, from a previous 1.9%, and called it a “troubling” development.
“We continue to expect the first Fed cut in June – and higher for longer rates keep the probability of recession elevated,” they wrote.
U.S. central bankers have kept the policy rate in the 5.25%-5.5% range since last July, and they no longer expect to need to raise rates further to bring inflation down to their 2% goal.
But they have signaled they want to hold off on any interest rate cuts until they are more confident that progress on inflation is sustainable.
Such progress may be “bumpy,” Fed Vice Chair of Supervision Michael Barr noted earlier this week; Atlanta Fed Bank President Raphael Bostic on Thursday said he did not yet have the confidence he would need to support a rate cut.
Friday’s stronger wholesale price data comes on top of other data, including a stronger-than-expected increase in consumer prices last month, that indicate the Fed’s battle against inflation may yet take some time, even as consumer spending appears to be slowing.
Traders of futures contracts tied to the Fed’s policy rate on Friday still see a June rate cut, but now give it about a 65% chance, down from 75% before the report. They are also betting the Fed will cut rates a total of four times this year, to bring the policy rate to a 4.25%-4.5% range by year end.
Fed policymakers themselves indicated in December they expect to deliver at least three rate cuts this year. They will update those forecasts when they next meet on March 19-20.
