The consensus outlook is still projecting that the Federal Reserve will trim its target interest rate by the end of the year. But as economic growth endures and energy prices rise, market sentiment is pricing in fewer cuts. Meanwhile, some analysts are now saying the quiet part out loud: there may no rate cuts in 2024.

There’s also the outlier scenario that may not no longer be an outlier: lifting rates. An event that in recent history was widely thought to have a near-zero probability for the rest of this cycle was revived on Friday, if only as a thought experiment, by Fed governor Michelle Bowman:

“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” she said.

Cue up Wednesday’s update (Apr. 10) on consumer prices for March, which will help clarify the outlook for monetary policy – or will it?

Economists are expecting a bit of a mixed bag for CPI data, according to consensus points forecasts via Econoday.com. Headline CPI is projected to tick lower on a monthly basis, but the 1-year trend is on track to strengthen to 3.5%, probably due to firmer energy prices last month. But core CPI, which strips out food and energy for a clearer measure of the trend, will dip on a monthly and year-over-year basis, analysts predict.  

The one thing you can count on is that the Fed’s 2% inflation target will remain elusive for the near term. Notably, core CPI (considered a more reliable measure of inflation’s trend) is still easing, which suggests a disinflation regime remains intact. But the fact that core CPI’s 1-year pace remains comfortably above the equivalent for headline CPI — and both are still above 3% — suggests that that it’s still premature for the Fed to declare victory and start cutting rates.

“This is a strong economy. Make no mistake, it is backed by debt and somewhat by overburdened credit cards, but it is a strong economy,” says George Lagarias, chief economist at Mazars. “So the Fed will struggle to find the case to cut rates soon.”

If the case for cutting rates is still premature, so is the view that the disinflationary trend has reversed. CapitalSpectator.com’s ensemble model for core CPI’s one-year change is projecting another slight dip to 3.7% for March from 3.8% in the previous month, based on the consensus point forecast. The possibility of sticky inflation is still lurking, the prediction intervals remind. The main takeaway: Progress on battling inflation is still unfolding, albeit at a slow rate. According to this modeling, the Fed’s 2% target is nowhere on the near-term horizon via core CPI.

Market sentiment is increasingly reflecting revised expectations. Fed funds futures have reduced the implied probability for a June rate cut to a coin flip – a conspicuous downgrade from roughly 70% two weeks ago.

Friday’s hotter-than-expected payrolls data for March isn’t helping the doves’ case for rate cuts. Private-sector hiring picked up last month, again — rising by the most in ten months.

“If the data is too strong, then why are we cutting?” asks Torsten Slok, chief economist at Apollo Global Management. “I think the Fed will not cut rates this year. Higher (rates) for longer is the answer.”

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