5 Economists On March Inflation Data: Will The Fed Pause Interest Rate Hikes After May?

The inflation rate unexpectedly came in at 5% year-over-year in March, down from 6% in February and lower than the 5.2% projected by the Street. It marks the lowest rate of CPI inflation since May 2021.

Core inflation, which excludes energy and food from the CPI basket, rose 5.6% year-on-year in March, matching expert estimates and rising from 5.5% in February.

Food prices increased at a reduced pace (8.5% vs 9.5% in February), while energy prices sank (-6.4% vs +5.2%), yet inflation for shelter, which accounts for more than 30% of the overall CPI basket, remained high (8.2% vs 8.1%).

The SPDR S&P 500 ETF Trust SPY spiked 1% higher after the release, before erasing nearly all of its gains an hour later during the Wednesday session. 

What does this March inflation data imply for the Fed policy and the markets going forward? Are investors correctly pricing in the end of interest rate hikes in June and the start of a cycle of cuts as early as this summer, or will the U.S. central bank maintain higher rates for an extended period of time despite signs of cooling price pressures?

Here are the takeaways of five economists following the March inflation report.

Robin Brooks, chief economist at the Institute of International Finance and former chief FX Strategist at Goldman Sachs:

SVB changes the way the Fed looks at incoming inflation data. Let's say core CPI comes in "hot" today. We know a negative credit impulse is building that's sharply raising US recession odds. Today's CPI won't capture that as it's inherently backward looking. CPI is a fade... pic.twitter.com/F4XXOWfn4x

— Robin Brooks (@RobinBrooksIIF) April 12, 2023

Gina Bolvin, president of Bolvin Wealth Management Group, said the March CPI print doesn’t reflect the time period of the financial crisis, which is a deflationary shock.

The CPI is backward looking and the Fed still has to determine how much of a credit crunch should be incorporated into the economy, Bolvin said. She also suggested that a rally in markets offers the Fed luxury to continue to hike rates, while a correction could force it to contemplate a pause.

John Lynch, chief investment officer for Comerica Wealth Management, is less optimistic about inflation dropping, stating that investors must differentiate between peak and sustained inflation.

Friday's jobs data should put the Fed on pace for a 25-basis-point hike in May, he said, adding that Comerica's investing strategy maintains a defensive stance, preferring quality and value.

Charlie Ripley, senior investment strategist for Allianz Investment Management, said the bulk of the inflation report's softness was caused by falling used car prices and a slower rise in shelter.

Overall, the CPI data does not leave much room for the Fed to continue raising policy rates after the May meeting, Ripley said, adding that it appears that we are approaching the peak in Fed policy rates. 

Peter Essele, head of portfolio management for Commonwealth Financial Network, said the "bond party" has kicked off, as longer duration fixed income assets now offer attractive prospects for investors.

Investors with significant cash deposits may wish to consider shifting to longer-term fixed income, which should perform well if inflation continues to decline, he said. 

Read also: Top 5 Financial Stocks That Are Set To Fly In April

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