Fed policymakers in March reaffirmed their forecast for three interest-rate cuts this year, but resurgent inflationary pressures are casting doubt on whether that will come to pass. Futures contracts tied to the federal-funds rate show a growing probability of just two cuts, if not fewer.
Analysts are beginning to chatter about the possibility that the Fed doesn’t cut interest rates at all this year.
“The market is trying to digest if rate cuts will come later, if we’ll see fewer cuts, and the growing possibility of no cuts this year,” said Young.
U.S. economic growth has remained resilient this year. An Atlanta Fed model on Monday raised its estimate for inflation-adjusted growth after manufacturing data came in stronger than economists anticipated. The model now forecasts the economy to have grown 2.8% in the first quarter, half-a-point higher than the previous estimate.
Signs that inflation could remain stickier than the Fed would like are pushing up long-term interest rates. Yields on 10- and 30-year Treasurys reached their highest levels since November. The benchmark 10-year yield finished the day at 4.363%.
Cleveland Fed President Loretta Mester said Tuesday she isn’t in a rush to cut interest rates this year and that she still sees lowering them too soon as a bigger risk than waiting too long.