PPI unexpected increase boosts the market, Federal Reserve may abandon interest rate cut expectations for the year.

Inflation pressure in the United States has risen again, causing the market to have significant doubts about the prospect of a rate cut by the Federal Reserve. Data released by the US Bureau of Labor Statistics shows that the Producer Price Index (PPI) in February exceeded expectations and recorded the largest increase in a year, prompting traders to reassess the monetary policy path and even consider the possibility that the Federal Reserve may not cut rates this year. After the data was released, interest rate futures markets quickly adjusted expectations, basically ruling out the possibility of an early rate cut this year. According to market pricing, the Federal Reserve is unlikely to cut rates until December at the earliest, and even then, the probability of a rate cut at the last meeting of the year has decreased to about 60%. Analysts believe that persistently high inflation levels, influenced by factors such as tariff policies, rising oil prices due to Middle East tensions, and high service sector costs, will force the Federal Reserve to maintain the current rate level for a longer period of time. The release of the PPI data coincided with the hours leading up to the Federal Reserve's announcement of its latest interest rate decision, further intensifying market tensions. Eugenio Aleman, Chief Economist at Raymond James, stated that this inflation data is likely to strengthen the Federal Reserve's decision to keep rates unchanged, and also push the policy statement towards a more hawkish tone. "Even if rates remain unchanged, policy communication may lean towards 'higher for longer', especially in the backdrop of potential energy inflation rearing its head." Before the outbreak of conflict in the Middle East on February 28, the market generally expected the Federal Reserve to cut interest rates once each in June and September, with the possibility of a third rate cut during the year. However, with inflation expectations rising, this assessment has clearly reversed. According to CME's FedWatch tool, market expectations for a rate cut in June have dropped to 18.4%, 31.5% in July, and 43.6% in September, showing a significant cooling of rate cut expectations. There is still some hope in the market for a rate cut at the end of the year, but confidence is clearly lacking. The futures market currently implies a federal fund rate of around 3.43% at the end of 2026, slightly lower than the current level of about 3.64%, indicating that the overall room for rate cuts has been greatly reduced. However, some believe that there are still variables in the future policy path. If the labor market significantly weakens, the Federal Reserve may still be forced to adopt an accommodative stance. Currently, Federal Reserve Governors Stephen Miran and Christopher Waller have publicly supported a rate cut as soon as possible, but the committee as a whole still tends to maintain rates unchanged until the inflation trend becomes clearer.