Higher inflation than expected in March confirms earlier concerns about its persistence. The markets have lowered expectations for Federal Reserve rate cuts to two this year (instead of three), with the first now expected in September rather than June. The report showed all-items and core inflation above the Fed's 2% target, with services prices rising significantly. This lackluster news contributed to a sell-off in the markets. There remains a possibility that no rate cuts occur this year due to the rising inflation.
Mohamed El-Erian, an economic expert, criticizes the Federal Reserve for relying too much on data, leading them to deviate from their strategy. He suggests a more long-term approach and potentially adjusting the inflation target closer to 3%. Recent statements from Fed policymakers indicate a potential shift towards this conservative stance.
Despite traditionally being the peak season for home sales, recent years have witnessed a shift in trends. Experts now recommend sellers wait until June, as homes listed in the first two weeks of that month have historically sold for up to 2.3% more compared to spring listings. While home supply is recovering, it's still not sufficient to meet demand, keeping prices elevated. Buyers may consider purchasing now and refinancing later when mortgage rates potentially decrease during the summer.
Fed Governor Christopher Waller believes more time is needed to see evidence of declining inflation before considering rate cuts. He is concerned that inflation may not fall to the Fed's target as expected. The upcoming data on inflation, consumer spending, and wages is being closely monitored by the Fed. Markets speculate that rate cuts may not occur until June or even July. Other Fed officials also express a willingness to cut rates later but emphasize caution.
Investors are shifting towards intermediate-term Treasury bonds (3-5 years) in anticipation of lower rates in the future. This contrasts with last year's preference for short-term bonds. David Botset sees higher yields and price appreciation with intermediate bonds. Nate Geraci cautions against relying heavily on the Fed's next move and suggests a more cautious approach on the yield curve due to potential ongoing inflation concerns.
