Washington D.C. – President Joe Biden’s hopes for a pre-election rate cut took a hit after new data on inflation and growth caused investors to adjust their expectations of action by the Federal Reserve. According to futures contracts, investors are no longer fully confident that the Fed will implement a quarter-point reduction by September. They now anticipate such a move by the central bank’s November 6-7 meeting after the November 5 election, where Biden will compete against his Republican opponent Donald Trump.
The shift in expectations followed the release of inflation-adjusted growth figures that came in lower than expected, with an annual rate of 1.6 percent for the first quarter. Additionally, the data indicated that the Fed’s preferred measure of underlying inflation spiked to 3.7 percent from 2 percent in the previous quarter, surpassing forecasts of 3.4 percent. Market watchers are eagerly awaiting the release of March numbers for the core personal consumption expenditures index.
Biden, who has been counting on the economy to boost his chances against Trump in the upcoming election, is facing challenges as borrowing costs remain at a 23-year high. Traders now perceive a roughly 75 percent likelihood of a Fed rate cut by September, a significant drop from near 100 percent prior to the recent data release. Market expectations regarding rate cuts have undergone significant changes, with some investors even betting on rate hikes by the Fed in the coming year.
The first-quarter annualized growth rate of 1.6 percent fell far below analysts’ expectations of a 2.5 percent increase and the revised rate of 3.4 percent for the fourth quarter of last year. Data from the Bureau of Economic Analysis revealed that U.S. consumers scaled back spending on cars, fuel, and restaurants in the first quarter, while increasing expenditures on financial services and insurance.
Responding to the figures, Biden praised what he described as “steady and stable growth,” while acknowledging that costs are burdensome for working families. Treasury Secretary Janet Yellen attributed the slowdown in GDP to “peculiar, but not concerning” factors and pointed to a rise in housing costs as a significant driver of price pressures. However, she expressed confidence that these pressures would alleviate as the year progresses.
Wall Street saw a sharp decline in stocks following the release of the data, with the S&P 500 dropping 1.1 percent and the Nasdaq Composite falling 1.5 percent by midday in New York. The 10-year U.S. Treasury yield rose to 4.71 percent, while the two-year yield climbed to 5 percent. Despite the disappointing GDP number, analysts continue to closely monitor inflation trends moving forward.