CPI data could push rate cuts to July: Economist

As the March Consumer Price Index (CPI) data came in hotter than expected, traders on Wall Street have once again begun to assess how the Federal Reserve may make its next policy decision. With more inflation data on the way and continued uncertainty surrounding ongoing geopolitical tensions, some on Wall Street have begun to reduce interest rate cut expectations.

Wolfe Research Chief Economist Stephanie Roth joins The Morning Brief to discuss recent inflation data and how she believes the market will be impacted moving forward.

"Today's data is not soft enough to change that narrative by any means, but it's a little bit more positive signal in terms of getting a little more progress on that front. It's not going to be convincing enough by June, but by July, we think there's a decent chance the Fed could actually be cutting...We were looking for three cuts starting in June. We had been admittedly questioning whether June was enough time to really convince the Fed and yesterday's print was enough to take us over the edge and push us to July," Roth says.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: CPI print yesterday coming in hotter than expected. That clearly spooked the markets. We're seeing some relief here ahead of today's open. Here to break it all down, we want to bring in Stephanie Roth, Wolfe Research Chief Economist. Stephanie, it's great to have you here on set. So at least it looks like in terms of the market's reaction there is a little bit of relief here today. Do you think that's the right read on that? Why am I not?

STEPHANIE ROTH: Definitely. So when you look at the data, now we're tracking core PCE somewhere around 0.24, 0.25, which is very different from the message we got yesterday with core PCE, core CPI coming in at 0.36%. So now we're tracking a lot better in terms of PC, which is what the Fed really cares about. Some of the details within the print especially on the services side, were favorable. So motor vehicle insurance was the story yesterday, that's what popped. That drove a six basis point acceleration in core CPI. That came in much more modestly in today's print, came in 0.6%, and that's what feeds into PC, so yeah.

- Yeah. And so a lot of questions with regard to this, as to what additional levers the Fed can pull right now to get this closer to their targets as well on inflation?

STEPHANIE ROTH: Yeah. I mean, they're just-- June's just a little bit too soon for them to be cutting rates. So we're now looking more, like July, the market has certainly priced that in. Today's data is not soft enough to change that narrative by any means. But it is a little bit more a positive signal in terms of at least getting a little bit more progress on that front. It's not going to be convincing enough by June. But by July, we think there's a decent chance that the Fed could actually be cutting.

SEANA SMITH: So did you change your base case as a result of yesterday's print?

STEPHANIE ROTH: We did. So we were looking for three cuts starting in June. We had been admittedly questioning whether June was enough time to really convince the Fed. And yesterday's print was enough to take us over the edge and push us to July.

SEANA SMITH: So there's some-- we're out there on the street yesterday saying some Wall Street pros were saying that, hey, actually yesterday's print wasn't that bad. They were highlighting some key areas of improvement when it comes to the inflation print there. That's silver lining read on yesterday's print at least. Is that realistic at all or no?

STEPHANIE ROTH: I mean, I have to say that was my read of it too to some extent.

SEANA SMITH: When you look at your Bloomberg screen, it doesn't look great right. You had a beat the Fed can't really deal with any more beats to some extent and be able to cut in June. That said, when you look in the details, you had deflation in terms of goods prices, which was something people were worried about in February because you started to see a little bit of a tick up in goods. People were wondering if this was going to be a trend, it's not. And then on the service side, a lot of it was driven by things like motor vehicle insurance.

And it was-- appears to be a bit of an aberration, my sense is that it will probably reverse in the coming months. And that took core CPI up from, well, it would have been 0.3 to 0.36.

- And so in the areas that we did see decreases in indexes within the CPI report as well where consumers are clearly pushing back on what prices that they are paying. Where then are we starting to see cracks within this broader consumer resiliency story as well?

SEANA SMITH: I mean, the consumer-- I mean, to be honest the consumer resiliency story is still in play, the consumer is still fairly resilient. I would say on the good side is probably where you're starting to see a little bit of softness. That's what was particularly strong in the back half of last year. Almost surprisingly so. So now you're getting a bit of a reversal on the good side and services, spending is starting to pick up a little bit, and our base case is you'll have fairly steady consumption this year. And the incremental driver of growth from this year compared to last year is going to be on the manufacturing side.