February inflation data remained elevated well above the Federal Reserve’s long run policy target pushing out expectations for the timing for monetary easing. The possibility of a rate change at this Wednesday’s Federal Open Markets Committee (FOMC) meeting seems to be off the table. Focus is more likely on any adjustments in the updated Summary of Economic Projections (SEP) year end Fed Funds dot-plot.

February consumer and producer inflation data both showed larger than desired price increases in the month. The BLS Consumer Price Index (CPI) Summary for February (March 12) found headline inflation increased 0.4% from January and 3.2% from the year prior. Core consumer inflation also increased 0.4% in February and 3.8% from a year ago. When we review the 6-month annualized core consumer inflation rate, core 6-month annualized CPI has increased to 3.9% which is the highest level since July.

Less critical to FOMC decision making but still part of the mosaic was the large uptick in producer inflation. BLS Producer Price Index (PPI) Summary for February (March 14) found PPI final demand higher by 0.6% from January. Much of the increases were from gasoline and food leaving the data less influential with monetary policy makers.

The updated inflation data leaves the CME FedWatch Tool projection an initial ¼ point cut in June and 2 additional ¼ point cuts in the second half of 2024. The interest rate futures curve now follows the December Fed SEP. With overwhelming consensus expectations for the FOMC to leave the policy rate unchanged this week, I believe markets will be most reactive to any changes in the updated SEP. Last December the FOMC reduced the median Fed Funds Projection for year end 2024 to 4.6% from 5.1%. The change correlated to a ¾ point reduction from the current policy rate. My guess is that the updated SEP dot plot stays fairly similar from December. There is already strong grouping around the 4.6% level with relatively few outlier projections. The greater market risk in my opinion is for a hawkish shift higher in SEP based on recent elevated inflation readings and continued economic resiliency that is also seen in labor market data.