Inflation cools less than expected, likely keeping rate cut on ice

Another higher-than-expected inflation reading may compel the Federal Reserve to continue postponing interest rate cuts, perhaps past May and June, asset managers said.

"Getting to the Fed's magical 2% inflation target may prove more difficult than expected and result in elevated interest rates for a longer period of time," said Regan Capital CIO Skyler Weinand, whose firm manages about $1.2 billion in assets. He expects the Fed to cut interest rates two or three times in 2024, "which is much less than the six rate cuts that the market expects."

Even though inflation is decelerating, Weinand noted, the Fed is concerned about "easing too quickly given the potential for an unexpected second bout of inflation, which would hurt consumers in a meaningful way."

Bryce Doty, senior portfolio manager and vice president at SIT Investment Associates, concurred that the higher-than-expected CPI figure for January means a Fed rate cut is "off the menu for now."

"We trust in certainties such as death, taxes, and the Fed being behind the curve and, as such, don't expect rate cuts until the second half of the year," Doty added. "From the Fed's perspective, economic growth is strong enough that there isn't a sense of urgency on cutting rates."

In the meantime, Doty added, bond investors will "get to enjoy higher yields a little while longer than many thought."

SIT has about $16 billion in AUM.

"We have long argued that a March (rate) cut is unlikely," said Alexandra Wilson-Elizondo, co-CIO of the multiasset solutions business at Goldman Sachs Asset Management. For now, she said she expect the first rate cut to come around mid-year. "That said, for asset allocators, the precise timing is less important than the direction of travel" she added. "In this context, we like being long (on) equities. However, a delayed Fed means a focus on cash-rich companies that benefit from higher real wages and a strong consumer, rather than on cyclicals that have indebtedness in floating rate form."

GSAM had $2.7 trillion in assets under supervision globally as of Sept. 30.

The Bureau of Labor Statistics reported on Feb. 13 that the consumer price index rose an annualized 3.1% from a year ago in January, above expectations, but below the 3.4% figure recorded in December.

Economists were expecting a 2.9% annualized CPI figure for January, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 3.9% in January, the same pace as 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 Feb. 13, 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 93.5% probability that the Fed will again keep rates unchanged when it issues its next monetary policy decision on Mar. 20, and only a 6.5% probability it will cut rates by 25 basis points.

However, fed futures are penciling in a 38% probability of a 25 basis point cut in rates at the next Fed meeting on May 1.

Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, said in response to the latest CPI data, a first rate cut in June "seems like the most reasonable expectation unless we see a very quick, severe drop in labor market activity or a geopolitical shock."

Janus Henderson has $308.3 billion in AUM.