Fed rate cuts off the table as inflation surges above 4%
The Federal Reserve is likely to hold US interest rates at its next meeting as inflation remains stubbornly high, affirms the CEO of global financial advisory giant deVere Group.
The comments from Nigel Green come as the Federal Reserve’s preferred inflation measure climbed to 4.1% in May, its highest annual reading since April 2023 and more than double the central bank’s 2% target. Core inflation, which strips out food and energy, also accelerated to 3.4%, while consumer spending remained firm, highlighting an economy that continues to generate inflationary pressure despite elevated borrowing costs.
He says: “The inflation story has changed again, and markets have been forced to change with it.
“Only a few months ago, the conversation centred on how quickly the Federal Reserve would begin cutting interest rates. Today, investors are asking a very different question: could the next move eventually be another increase?
“Inflation above 4% is uncomfortable for any central bank. It becomes even more uncomfortable when consumers are still spending, employment remains resilient and the economy continues to expand.”
Nigel Green continues: “The Federal Reserve cannot declare victory over inflation while its preferred measure is running at more than twice target.
“The rise in energy prices linked to conflict in the Middle East has clearly played a role, but policymakers will be equally concerned that underlying inflation has also moved higher.
“Oil prices have eased since the ceasefire, which is encouraging, but inflation has momentum. One month’s relief at the petrol pump doesn’t erase broader price pressures across the economy.”
He says the biggest shift has been in investor expectations.
“At the start of the year, markets were looking ahead to a series of interest rate cuts. Those expectations have largely evaporated.
“Investors increasingly accept that borrowing costs are likely to remain elevated for longer than almost anyone anticipated. Some are even beginning to price the possibility that rates may have to move higher before they move lower.
“That is a remarkable change in sentiment over a very short period.”
Nigel Green believes the resilience of the US economy gives policymakers little reason to rush.
“The labour market has refused to crack. Consumer spending remains healthy. Growth has held up far better than many predicted.
“Central banks cut rates when inflation is under control or when economic weakness demands support. Neither condition has been convincingly met.
“The Federal Reserve has the luxury of patience, and patience is exactly what this environment requires.”
He warns investors against expecting an imminent return to ultra-cheap money.
“Many portfolios were built around the assumption that lower rates would quickly return. Those assumptions deserve another look.
“Markets perform best when investors respond to economic reality rather than wishful thinking.
“The era of assuming every bout of market uncertainty will be met with rapid monetary easing looks increasingly distant.”
Nigel Green says persistent inflation also raises the stakes for financial markets.
“Higher-for-longer interest rates affect every asset class. They influence company valuations, government borrowing costs, mortgage markets, currencies and investment flows.
“Every inflation report now carries greater significance because it has the potential to reshape expectations for monetary policy.”
He concludes: “The Federal Reserve is unlikely to move hastily while inflation remains this elevated.
“Officials know credibility is earned by defeating inflation, not by declaring success too early.
“The direction of travel for interest rates has become much less predictable than markets believed only a few months ago.
“Investors should prepare for an environment where interest rates stay restrictive for longer and where every major inflation release has the potential to shift expectations again.”