Inflation, US elections expected to affect Fed’s rate cut cycle

ISTANBUL

Uncertainties remain as to when the Fed will start its interest rate cuts, with the course of inflation in the US and the presidential elections expected to affect a possible rate cut cycle.

According to experts, the Fed will keep its interest rates unchanged at its March conference, while there is still uncertainty caused by mixed signals from macroeconomic data on when the bank will start cutting rates.

The US Consumer Price Index (CPI) increased 0.4% month-on-month in February, within expectations, while it exceeded market forecasts with an increase of 3.2% on an annual basis.

The Producer Price Index (PPI) hiked 0.6% on a monthly basis, and 1.6% year-on-year in February, exceeding expectations.

The Core PPI, which excludes volatile food and energy prices, also outperformed forecasts, rising 0.3% month-on-month, and 2% on an annual basis in the same period.

“Inflation is running too hot for the Fed to be confident that they’re going to achieve their target of 2%,” Chris Rupkey, chief economist at FWD Bonds, told Anadolu.

He stated that the Fed may take one of the three interest cuts foreseen for this year off the table due to the high inflation.

“The presidential election is ahead as well and although policymakers traditionally say they're not political, I think they would have to be brave to venture out and cut interest rates at the September meeting before the November elections,” he said.

“I can't recall any other Fed in recent economic history that has cut rates so close to a presidential election so maybe we still get one rate cut in June if the monthly inflation reports cool off,” he added.

Rupkey mentioned that Fed officials signaled that they are in no hurry, and that there could be a rate cut at the December meeting this year post-elections, adding that the Fed could end the year with a 5% interest rate.

- ‘Risk that Fed will start interest rate cut later than June has increased’

“The FOMC (Federal Open Market Committee) needs to see more data to gain confidence that inflation is heading sustainably toward its 2% target,” Philip Marey, senior US strategist at Rabobank, told Anadolu.

Marey said they continue to estimate that the first interest rate cut will be in June, though the risk that the Fed will start later than June has also increased.

He noted that once the Fed starts cutting rates, it can continue to cut by 25 basis points per quarter.

“However, since our new economic forecasts assume a Trump victory in November, leading to a universal import tariff, we expect inflation to rebound in 2025,” he said.

“This is likely to cause a pause in the Fed’s cutting cycle during the course of next year,” he added.

Salomon Fiedler, economist at Berenberg, told Anadolu that they “expect the Fed will wait until June before cutting rates,” as “the recent stronger-than-expected inflation data supports this call.”

*Writing by Emir Yildirim