The chances of the Federal Reserve cutting interest rates are evaporating

Thursday's economic activity report served as another rude awakening for investors and Federal Reserve policymakers who had hoped that falling inflation would pave the way for interest rate cuts this summer.

Contrary to expectations, Commerce Department data revealed that inflation remained stubbornly high for a third consecutive month, despite a noticeable slowdown in the second half of the previous year.

While individual readings on growth and prices this year have not dramatically changed the Fed's outlook, the accumulation of these disappointments has prompted a reassessment among investors and Fed officials. Of particular concern is the persistence of inflation data, which has consistently exceeded expectations, with recent months seeing upward revisions in subsequent reports. This trend has led to doubts about the timing and necessity of interest rate cuts in the near future.

Chicago Fed President Austin Goolsby emphasized the importance of this trend, stating:

I always say that a month is not a month, but three months - that's at least one real month.

He noted the need to readjust monetary policy with the inflation rate above the target level of close to 2% after several months of strong improvement.

At the start of the year, policymakers and market participants expected slower growth and subdued inflation, assuming these conditions would allow the Fed to gradually roll back interest rate hikes. However, the reality was just the opposite. Economic growth proved more resilient than expected and inflation remained unexpectedly strong.

The Commerce Department's latest report revealed that while gross domestic product increased at a 1.6% seasonally adjusted annual rate, the broader gauge of underlying demand showed solid momentum approaching 3%. Inflation in the first quarter also beat expectations, with core prices rising 3.7% year-on-year and 2.9% year-on-year, according to the Personal Consumption Expenditure Price Index.

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