Bank of America reexamines the Federal Reserve's potential rate cut timeline after the March Consumer Price Index report surpassed expectations, marking the third consecutive month of higher-than-anticipated core inflation rates. Despite retaining a tentative prediction for a rate cut in June, BofA expresses low confidence in this forecast due to the persistence of inflation, particularly in non-shelter services and shelter costs. The March CPI data suggests that the beginning of the Fed's easing cycle might be postponed, with possible delays extending to December of this year or even March of the next.
Key Points:
- Persistent Core Inflation: March's CPI data revealed a continuation of sticky inflation, with core CPI recording a 0.4% month-over-month increase for the third consecutive month.
- Fed's Inflation Narrative Challenged: The report poses challenges to the Fed's supply-side narrative and expectations for swift disinflation, especially given persistent shelter inflation and potential re-acceleration in non-shelter services.
- Uncertain Rate Cut Timeline: BofA maintains its expectation for a June rate cut, albeit with diminished confidence. The March CPI report increases the likelihood of a delay in the Fed's easing cycle.
Conclusion: The March CPI report's indication of enduring inflation pressures complicates the Federal Reserve's pathway to initiating its easing cycle, potentially deferring rate cuts beyond the initially anticipated June timeframe. With inflation proving more persistent than expected, particularly in shelter and non-shelter services, BofA's confidence in a June rate reduction is tempered, highlighting the need for further data to gauge the trajectory of inflation and, consequently, the timing of monetary policy adjustments.
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