The Federal Reserve is unlikely to cut interest rates until at least July, according to Nigel Green, CEO of deVere Group, as surging oil and gas prices complicate the outlook for monetary policy.
The assessment comes as investors digest the latest US consumer price index data for February, which shows that US consumer prices rose 0.3% in February and were up 2.4% from a year earlier.
Core prices, excluding the volatile food and energy categories, were up 0.2% from January and 2.5% over the past 12 months.
Geopolitics has rapidly re-entered the inflation equation. Oil prices spiked to around $120 a barrel earlier this week amid escalating tensions involving Iran and the wider Middle East.
Prices have since eased but remain elevated, adding another layer of uncertainty for policymakers already weighing stubborn services inflation and a resilient US economy.
Green said the combination of energy-driven inflation risks and steadier-than-expected economic momentum is pushing expectations for the first rate cut further into the year.
“The window for the first rate cut has materially shifted,” he said.
“Markets had been looking for earlier action, but inflation dynamics and the spike in oil prices mean policymakers will almost certainly hold next week and remain cautious in the months ahead.”
Investors widely expect policymakers to leave interest rates unchanged at the upcoming meeting. Attention has therefore turned to how long the current policy stance will remain in place.
The deVere CEO believes that July now represents the earliest credible opportunity for the first reduction in borrowing costs.
“Energy prices are feeding directly into inflation expectations again. With oil surging on Middle East tensions and the economy still showing resilience, there’s little urgency to cut immediately,” he explained.
The shift marks a significant adjustment from earlier expectations at the start of the year, when markets were anticipating a series of rate cuts beginning in the spring.
Pace of policy easing
Instead, investors are now being forced to reassess the pace of policy easing as inflation proves slower to settle and global events inject fresh volatility into commodity markets.
Green noted that policymakers will want clearer evidence that inflation is firmly moving lower before initiating a rate-cut cycle.
“Officials will want confidence that inflation is on a sustainable downward path. The recent move in oil makes that harder to establish in the near term,” he said.
According to Green, the Fed will argue that the resilience of the US economy strengthens the case for patience.
Labour markets remain firm and consumer spending continues to hold up better than many expected, reducing pressure for an early shift in policy.
For financial markets, the delay in rate cuts reinforces the ‘higher for longer’ environment that has characterised much of the past year.
“Expectations are evolving quickly. July now looks like the earliest realistic point for the first cut, and even then, the easing cycle is likely to be gradual,” he said.
“Inflation progress has slowed and energy prices have jumped. Those factors together mean policymakers at the Fed will be in no rush to cut rates any time soon,” Green concluded.
