Fed rate cut seen on track for June even as inflation bumps up

AN INCREASE in US inflation last month that was largely in line with expectations likely won’t change the calculus for US central bankers weighing when to deliver a first interest-rate cut, traders bet on Thursday (Feb 29).

Federal Reserve policymakers have said they expect the path to their 2 per cent inflation goal to be bumpy. With a lot of progress already in hand they are unlikely to be overly concerned by one month of data that suggests a step back.

The 0.4 per cent January increase in the core personal consumption expenditures price index reported by the Commerce Department’s Bureau of Economic Analysis was exactly such a number, more than double the monthly rate needed for smooth progress to the Fed’s goal.

Compared with a year ago the rate still ticked down, to 2.8 per cent from 2.9 per cent in December.

“If we get one or two months of the lower inflation, especially on year over year on the core, then maybe a June rate cut could be back on the table,” said Peter Cardillo, chief market strategist at Spartan Capital Securities.

After the report traders were pricing in about a 67 per cent chance of a Fed policy rate cut in June versus about 60 per cent before the data, and were betting on two more interest-rate cuts by the end of the year.

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US inflation increases in line with expectations in January

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That would bring the policy rate to a range of 4.5 to 4.75 per cent, down from the current 5.25 to 5.5 per cent range where it has been since last July.

Boston Fed president Susan Collins on Wednesday said waiting for all inflation data to point in the same direction before cutting rates would be “too high a bar.”

Still, she and her colleagues say they want to see more evidence that inflation is trending downward before changing the policy rate. REUTERS