February CPI puts Fed rate cut on hold, asset managers say

A somewhat higher-than-expected February inflation figure raises questions about exactly when the Federal Reserve will consider cutting interest rates, given that the CPI figure still remains well above the central bank's 2% target, asset managers said.

Skyler Weinand, chief investment officer at Regan Capital, said he thinks it's a "coin flip" as to whether the Fed cuts interest rates in June or if it takes a "more conservative approach" and waits until the Sept. 18 meeting.

"The last mile of price stability is proving to be the hardest, and (annualized) inflation was able to decelerate from 9% to 3% rather quickly, but the path to the Fed's 2% target may take more time than expected," he added.

The Fed, Weinand noted, typically cuts interest rates to "get ahead of an impending economic slowdown, and with the economy running so strong currently, it's difficult to justify any rate cuts this year."

Still, Weinand thinks the Fed is likely to cut interest rates one or two times this year, as an "acknowledgment that inflation has meaningfully decelerated, even if it's not quite fully back to its 2% target."

Regan has $1.2 billion in assets under management.

But Brian Mulberry, client portfolio manager at Zacks Investment Management, said that while prices are "leveling off," inflation has remained "durable" into the new year, meaning the Fed probably can't cut rates yet.

"There is not enough room to ease based on this data," he noted. "Core inflation is still nearly double the 2% target at 3.8% so I would expect more patience from the Fed."

Zacks Investment has $15.1 billion in AUM.

The Bureau of Labor Statistics reported on March 12 that the consumer price index rose an annualized 3.2% from a year ago in February, above expectations, and also slightly above the 3.1% figure recorded in January.

Economists were expecting a 3.1% annualized CPI figure for February, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 3.8% in February, slightly below the 3.9% pace reported in the prior month.

The Fed has considered the inflation rate a key factor in its monetary policy decisions.

The Fed's key short-term interest rate is now in a range of between 5.25% to 5.5% — after the central bank kept rates unchanged for the fourth consecutive time at the Jan. 31 meeting.

As of the morning of March 12, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is an overwhelming 99% probability that the Fed will again keep rates unchanged when it issues its next monetary policy decision on March 20, and only a 1% probability it will cut rates by 25 basis points.

Josh Jamner, investment strategy analyst at ClearBridge Investments, said that the latest CPI data "does not preclude nor confirm a rate cut from occurring around mid-year," but added that the Fed will have "additional inflation data in hand by the time of their subsequent meetings (later this year) that will be more important to their decision-making than today's release."

ClearBridge had $155.2 billion in assets under management as of Sept. 30.

Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, said the latest data suggests that a rate cut at the Fed's meeting on May 1 is off the table.

"I still see June as the most likely month for the first cut, but this could shift to July if the inflation data does not start to improve next month," he added. "The Fed's rhetoric will still slant in the direction that they still see inflation on an improving trend, but it will likely be perceived as less dovish than (Chair Jerome) Powell's recent testimony."

"We're waiting to become more confident that inflation is moving sustainably at 2%," Powell told the Senate Banking Committee on March 7. "When we do get that confidence, and we're not far from it, it'll be appropriate to begin to dial back the level of restriction."

Janus Henderson has $308.3 billion in AUM.