CPI Data Fuels Rate-Cut Bets as Fed Officials Urge Caution

US inflation eased, boosting expectations for rate cuts, but Federal Reserve officials signalled that policy easing may still be some distance away.

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US inflation data released Tuesday strengthened expectations for earlier interest-rate cuts, after core CPI slowed to its lowest level since March 2021.

Markets responded quickly, with the probability of an April rate cut rising to around 42%, though June remains the most widely anticipated timing for the first reduction.

Despite the shift in market expectations, Federal Reserve officials pushed back against the idea of imminent easing. Policymakers reiterated that inflation has not yet returned sustainably to target and warned that cutting rates too early could undermine progress.

Minneapolis Fed President Neel Kashkari said recent tensions reflect a growing disconnect between market expectations and policy realities. He emphasised that current data does not justify immediate easing and that decisions should remain driven by inflation trends rather than political pressure.

Philadelphia Fed President Patrick Harker adopted a more measured stance, noting that if inflation continues to ease and labour market conditions remain stable, a window for moderate rate cuts could open later in the year. However, he supported holding rates steady in the near term to allow for further data assessment.

Chicago Fed President Austan Goolsbee echoed the need for caution, stating that while price pressures have softened, evidence remains insufficient to justify a policy pivot. He added that a resilient labour market gives policymakers flexibility, but inflation returning to target remains the priority.

Kansas City Fed President Jeffrey Schmid struck a more hawkish tone, arguing that inflation remains elevated and that current policy is not overly restrictive. He signalled limited justification for rate cuts and supported maintaining a restrictive stance if necessary. St. Louis Fed President Alberto Musalem expressed similar views, noting there is little urgency to ease policy at this stage.

Boston Fed President Susan Collins warned that the Fed has not yet “won the fight” against inflation and stressed the need to maintain restrictive conditions to prevent a resurgence. San Francisco Fed President Mary Daly described current rate levels as “appropriate” and emphasised that any adjustments should be gradual to avoid disrupting disinflation progress.

In contrast, Federal Reserve Governor Michelle Bowman reiterated her call for rate cuts, arguing that regulatory easing could support growth without reigniting inflation. Meanwhile, Fed Chair candidate Rick Reed, speaking in a recent interview, backed lowering rates toward 3%, suggesting such levels would better support stable economic expansion.

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