New York Fed Survey Shows Three-Year Inflation Expectations Rise
Concerns Over "Trumplation"... Hopes for Rate Cuts This Year Diminish
BoA: "Rate Freeze Expected for This Year... Possibility of Hikes Remains"
U.S. consumers' three-year inflation expectations have risen. Amid recent increases in inflation, expectations for inflation have also climbed ahead of the launch of Donald Trump's second term, causing forecasts for additional Federal Reserve (Fed) rate cuts this year to retreat. On Wall Street, the possibility of rate hikes is now being discussed.
On the 13th (local time), the New York Federal Reserve Bank (New York Fed) reported that the median expected inflation over the next three years, based on a survey of consumer expectations conducted in December last year, rose to 3% from 2.6% in the previous month.
The median expected inflation one year ahead remained unchanged at 3% compared to the previous month’s survey. The median expected long-term inflation five years ahead fell from 2.9% to 2.7% during the same period.
The University of Michigan survey released last week showed a similar trend. According to the University of Michigan’s January Consumer Sentiment Index announced on the 10th, the one-year inflation expectation rose sharply to 3.3% from 2.8% in the previous month.
Consumer sentiment regarding the labor market also cooled. The New York Fed survey showed that the probability of successfully finding a new job after being laid off from the current job dropped significantly to 50.2% from 54.1% in the previous month, marking the lowest level since 2021. The probability of unemployment over the next year fell by 1.6 percentage points to 11.9%, but the probability of voluntary resignation also declined by 2.0% to 18.2% during the same period.
The probability of failing to repay debt over the next three months reached 14.2%, the highest since April 2020.
Following last month’s surprise employment data release and the rise in inflation expectations, market expectations for rate cuts have diminished. Concerns are emerging that the tariff increases, immigration restrictions, and tax cut policies of President-elect Donald Trump, who will take office on the 20th, will stimulate inflation and prolong the high interest rate environment.
On Wall Street, JP Morgan, Goldman Sachs, Citigroup, and Barclays have delayed the timing of the Fed’s first rate cut this year from the first quarter to the second quarter following the employment data release. JP Morgan and Goldman Sachs reduced their forecasts for the number of rate cuts this year from three to two, while Barclays cut its forecast from two to one. Bank of America (BoA), which had expected two rate cuts this year, has revised its outlook to a rate freeze for the year.
The market is focusing on the Consumer Price Index (CPI) to be released on the 15th. Along with the Personal Consumption Expenditures (PCE) price index, the CPI, a key inflation indicator, is expected to have risen 2.9% last month, exceeding the previous month’s figure of 2.7%.
BoA stated, "Considering the tight labor market, solid growth, and inflation exceeding the Fed’s target, we believe the current Fed rate cut cycle has ended. On the contrary, if the core PCE inflation rate remains close to 3% and long-term inflation expectations become entrenched, the possibility of the Fed raising rates cannot be ruled out."
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