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Joe Biden’s hopes of a pre-election rate cut were dealt a blow on Thursday after inflation and growth data led investors to push back expectations of a move by the Federal Reserve.
According to futures contracts, investors are now no longer fully confident that the Fed will deliver its first quarter-point reduction by September.
They are instead now only fully pricing in such a move by the central bank’s November 6-7 meeting, immediately after the November 5 election, when Biden is set to face his Republican rival Donald Trump.
The shift came after inflation-adjusted growth figures came in well below expectations at an annual rate of 1.6 per cent for the first quarter.
The data also showed that the Fed’s preferred metric of underlying inflation jumped to 3.7 per cent from 2 per cent in the final quarter of last year — exceeding forecasts of 3.4 per cent.
March numbers for the measure, the core personal consumption expenditures index, are due to be published on Friday.
Biden has been hoping the economy will help him overtake Trump ahead of November’s vote, but borrowing costs are still at a 23-year high.
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Traders now give a roughly 75 per cent likelihood to a Fed rate cut by September, compared with close to 100 per cent before Thursday’s data release.
Market expectations of cuts have shifted dramatically in recent months, with some investors even betting on the Fed raising rates over the next year. In January, investors expected as many as six quarter-point cuts this year.
“If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach,” said Olu Sonola, head of US economic research at Fitch rating agency.
Thursday’s first-quarter annualised growth rate of 1.6 per cent was far below analysts’ expectations of a 2.5 per cent rise and the revised rate of 3.4 per cent for the fourth quarter of last year.
According to the data from the Bureau of Economic Analysis, US consumers spent less on cars, fuel and restaurants in the first quarter, but more on financial services and insurance.
Sameer Samana, senior global market strategist at Wells Fargo, described the release as “almost stagflationary: where you’ve got growth slowing but prices are still a little bit stickier than markets and the Fed had hoped for”.
Biden responded to the figures by hailing what he described as “continued steady and stable growth” while adding that “costs are too high for working families”.
US Treasury secretary Janet Yellen told Reuters that the slowdown in gross domestic product was down to “peculiar, but not concerning” factors. She attributed the rise in price pressures largely to an increase in housing costs that she had “no doubt” would fall as the year went on.
Wall Street stocks dropped sharply after the opening bell. By lunchtime in New York, the benchmark S&P 500 gauge was down 1.1 per cent, while the technology-heavy Nasdaq Composite was down 1.5 per cent.
The 10-year US Treasury yield, which moves inversely to bond prices, climbed 0.06 percentage points to 4.71 per cent. The two-year yield rose 0.07 percentage points to 5 per cent.
Lindsay Rosner at Goldman Sachs Asset Management described Thursday’s figure as “a disappointing GDP number”, saying it reflected falls in the growth of consumer demand and government spending.
But she added: “That being said, the focus unequivocally is on inflation.”