Inflation Data Not Yet Cooperating for Interest Rate Cuts This Year – But That May Change

Inflation Data Not Yet Cooperating for Interest Rate Cuts This Year – But That May Change

March 12, 2024 — At the start of 2024, conventional wisdom held that Federal Reserve Chairman Jay Powell would initiate a series of interest rate cuts throughout the year as inflation began to slow. Some optimistic economists even predicted up to six cuts in total for this year.

However, the financial narrative took an unexpected turn. Higher-than-expected inflation data emerged for the second consecutive month, potentially impeding the anticipated interest rate cuts this year. Consumer prices jumped 3.2% in February from last year and 0.4% from January, according to the February Consumer Price Index (CPI) released Tuesday.

The Fed raised interest rates 11 times from March 2022 to May 2023, hoping to reduce inflation to 2%, down from its peak of 9% in mid-2022.

Powell told Congress last week that the Fed needs “just a bit more evidence” that the economy will likely drop to 2% growth before instituting rate cuts this year.

The Fed is meeting next week but is not expected to make any announcements other than reinforcing the need for more data before changing its policy.

While the CPI generates headlines, the Fed’s more significant data point is the PCE (Personal-Consumption Expenditures price index), which is slated to be released on March 29. Since 2000, the Fed has relied on the PCE index to determine the nation’s level of inflation. The spending is typically less than what is reported by the CPI, which bodes well for potential rate cuts later this year. It was up 2.4% in January from last year — closer to the 2% number the Fed has set as its bar before cutting rates.

For now, the question is not whether the Fed will implement rate cuts but when and at what level. What the PCE numbers look like at the end of the month will likely determine whether the Fed will reduce rates in June or later. A lower number from the PCE could mean two to three interest rate cuts for the second half of 2024.

The answer is important for the auto industry. Lower interest rates make it easier for consumers to secure loans for vehicle purchases. Combined with the ongoing incentives and price cuts for automobiles, lower interest rates could mean a vibrant fourth quarter for auto sales.

On the M&A front, lower rates will remove some of the obstacles keeping transactions from happening, which means, the auto retail sector likely will significantly more action than it has the last 18 months.

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