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.

 source : 

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

Tariffs on Canada, Mexico, and China

 On March 3, 2025, President Trump announced new tariffs on Canada, Mexico, and China, set to begin the next day. These include a 25% tariff on Mexican and Canadian exports and 10% on Chinese goods, citing concerns over drugs and immigration. This could disrupt trade and increase product costs, including cars and vegetables. The move may damage U.S. relations with its neighbors, as Canada and Mexico depend heavily on trade with the U.S. Both countries are preparing retaliatory tariffs, with Canada considering energy export cuts. Trump’s tariffs have raised concerns in businesses, particularly in the automotive sector, which may face higher costs, while small businesses, like those importing from China, are also affected. While Mexico and Canada have taken action to address U.S. concerns, China has not yet offered concessions.

https://www.nytimes.com/2025/03/03/business/economy/trump-tariffs-china-mexico-canada.html 

Europe shifts gears

 In response to shifting U.S. policy on Ukraine and growing uncertainty about NATO’s future, Europe is preparing for a massive increase in defense and infrastructure spending. Germany’s two major political parties are proposing nearly €900 billion in new funds, aimed both at strengthening defense and addressing long-overdue infrastructure investment. Meanwhile, European Commission President Ursula von der Leyen has called for an additional €800 billion in EU-wide defense spending, even suggesting that EU members should be allowed to bypass borrowing caps to finance these efforts.

From an economic standpoint, this marks a major shift from Europe’s historically cautious fiscal policies. After years of limited public investment and strict borrowing limits, this proposed wave of spending could serve as a significant fiscal stimulus, boosting growth and possibly pulling the eurozone out of stagnation. Increased public investment in infrastructure could raise productivity over the long term, while defense spending would address growing security concerns, especially with the ongoing war in Ukraine and uncertainty over future U.S. support.

However, this dramatic increase in borrowing also raises questions about the future of European debt and inflation. Since the announcement of these plans, German government bond yields have surged, reflecting market expectations of higher borrowing costs. The euro has also strengthened against the dollar, signaling confidence in Europe’s economic outlook but potentially hurting European exporters. At the same time, defense company stock prices have soared, as investors anticipate a flood of new government contracts.

The key debate now is whether this spending surge will successfully stimulate Europe’s economy and improve security, or whether it will come at the cost of rising debt and inflation. With borrowing limits set to be broken, there is also a larger discussion about whether Europe should maintain fiscal discipline or prioritize investment and defense in this new geopolitical reality.

https://www2.deloitte.com/us/en/insights/economy/global-economic-outlook/weekly-update.html