In a bid to quell market concerns following the latest inflation reading, two Federal Reserve officials have expressed optimism that interest rates could still be slashed this year. New York Fed president John Williams remarked that if the economy progresses as anticipated, it would be sensible to gradually reduce rates, beginning in 2019. Williams acknowledged the possibility of temporary bumps along the way, acknowledging recent fluctuations in inflation indicators. Similarly, Boston Fed president Susan Collins affirmed her expectation of rate cuts later this year, but emphasized the need for more data to gain confidence in a sustained drop in inflation. This cautious approach could result in fewer interest rate cuts in 2024.

Collins noted that recent inflation data has not significantly altered her outlook, but highlighted the uncertainties surrounding timing and the importance of patience. She indicated that it might take longer to ascertain if the economy is on a sustainable path towards 2% inflation, thereby warranting less policy easing this year than previously assumed. Additionally, Collins suggested that interest rates may not be as restrictive as initially believed, further diminishing the urgency to lower rates. She was unsurprised by the recent uptick in inflation figures, citing lower readings in the second half of last year.

The Consumer Price Index (CPI) revealed a 3.5% increase over the previous year in March, exceeding economists' expectations and surpassing February's 3.2% annual price gain. The core CPI, which excludes volatile food and energy prices, remained at 3.8%, the same level as in February but slightly higher than anticipated.

Collins emphasized the importance of observing a decline in two key inflation components, namely housing and non-shelter services, to further validate the downward trend. She also emphasized the need for short- and long-term inflation expectations to align with the Fed's 2% target.

These comments from Williams and Collins followed a tumultuous day in the markets, as investors grew concerned that higher-than-expected inflation would delay interest rate cuts. Consequently, the stock market experienced a decline, causing expectations of a rate cut in June to diminish. Traders now approximate a 79% probability of the Fed maintaining rates in June and around a 50% chance of a cut in July. Additionally, the number of projected rate cuts this year has been reduced to two, fewer than the three previously estimated by Fed officials in March.

Minutes released from the March policy meeting indicate that "almost all" participants agreed on the likelihood of rate cuts this year, but acknowledged the need to consider the possibility that early-year inflation readings were statistical aberrations and should not be dismissed. The minutes also highlighted officials' uncertainty regarding the persistence of high inflation and their desire for more confidence in the sustainability of a downward trend.

Despite these uncertainties, Fed officials confirmed that the peak of the current rate-tightening cycle has been reached, affirming the central bank's readiness to adapt monetary policy to the economic outlook. They expect volatility in monthly inflation readings as they strive to achieve their 2% inflation target. Williams echoed these sentiments, expressing his expectation that the Personal Consumption Expenditures index, the Fed's preferred inflation measure, would range from 2.25% to 2.50% this year before approaching 2% in the following year.