Fed Rate Cuts Unlikely Amid 2.4% Inflation, Strong Jobs Data
JPMorgan Chase has highlighted two key factors that are constraining the Federal Reserve from cutting interest rates, noting that the Fed's final decisions often lag behind economic conditions. As President Trump continues to urge the Fed to lower rates, the central bank finds itself in a challenging position. JPMorgan Chase analysts have indicated that it is highly unlikely for the Fed to cut interest rates during its May policy meeting, and the likelihood of a rate cut in subsequent meetings remains low.
The first factor constraining the Fed is the rising inflation expectations, which make it difficult for the central bank to initiate rate cuts. The latest consumer inflation report showed a year-on-year increase of 2.4% in March, surpassing the Fed's 2% target. While this figure is relatively low compared to future projections, the one-year inflation expectation compiled by the University of Michigan stands at 6.5%. Trump's tariff policy is anticipated to elevate consumer costs, driving up inflation expectations significantly. The trade war has intensified concerns about stagflation, where the economy stagnates while prices continue to rise, placing the Fed in a dilemma as it struggles to address both issues simultaneously.
The second factor is the robust macroeconomic data, which has not yet indicated the necessity of a rate cut. Despite concerns about inflation expectations, current macroeconomic data remains strong. Last Friday's positive April non-farm payroll report boosted investor confidence and drove the stock market higher. The market has not priced in an imminent recession, as evidenced by the S&P 500 Index's forward P/E ratio of 21 times, with earnings per share expected to grow 10% this year and 14% next year. This data does not reflect significant concerns about a recession, further complicating the Fed's decision-making process.
