Why The Fed Isn't Ready To Cut Interest Rate Despite Lower Inflation

 

February’s inflation reports brought mixed news. The Consumer Price Index (CPI) and Producer Price Index (PPI) both came in lower than expected, suggesting some relief. However, the Federal Reserve does not rely on these measures alone. Instead, it looks at the Personal Consumption Expenditures (PCE) price index, which provides a more complete narrative of consumer spending. Many economists predict the upcoming PCE report will show inflation at 2.8%, up from 2.6% in January, moving further away from the Fed’s 2% target. With inflation still a concern, rate cuts are unlikely in the near term.

The numbers back this up. Bank of America and Citigroup expect core PCE inflation to land at 2.7%, while other analysts predict 2.8%. These figures signal that inflation is not cooling fast enough for the Fed to act. Some key sectors are contributing to price increases, including hospital care, insurance, and air transportation. The Federal Open Market Committee (FOMC) meeting next week is not expected to bring any changes, with market traders placing almost zero chance of a rate cut and only a 25% chance for May.

There may still be some positive developments ahead. Citi predicts that inflation will decline in March, potentially allowing for rate cuts later in the year. Currently, market expectations lean toward a rate cut in June, but that depends on whether inflation slows significantly in the coming months. Until then, the Fed will likely maintain its cautious stance, watching for sustained improvements before making any moves.

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https://www.cnbc.com/2025/03/13/why-this-weeks-positive-inflation-reports-wont-look-as-good-to-the-fed.html