The Zhitong Finance App learned that the possibility that US inflation may not drop significantly has raised concerns. There are fears that the Fed's policymakers are mistakenly insisting on the prospect of three interest rate cuts this year, which could lose their credibility and trigger cross-asset fluctuations.

These concerns were growing before the Personal Consumer Expense Price Index (PCE) was released in February. Quant Insight, an analysis company based in London, which manages total assets of more than $7 trillion, raised the question of whether US policymakers are insisting on predicting interest rate cuts of 25 basis points three times in 2024, thereby “driving themselves to a dead end” and making policy mistakes.

Quant Insight asked in a report this week: “Is the risk now that deflation is stagnant — in the face of strong GDP growth, tight labor markets..., rising energy and metals prices, and three upcoming interest rate cuts?”

If so, the impact could be profound, starting with the Federal Reserve's possible loss of credibility. Quant Insight said that this loss may be reflected in the following aspects: rising long-term US inflation expectations, which may lose support; weakening US dollar; rising long-term interest rates; widening credit spreads again; widespread funding concerns; and finally, rising cross-asset volatility.

Stocks have been trading at or near their all-time high since the Federal Reserve officials maintained their forecast for three interest rate cuts until December last Wednesday. PCE data for February is expected to show that the annual core inflation rate remains at 2.8% after accounting for 0.3% monthly growth. Meanwhile, economists expect the headline PCE inflation rate to rise 0.4% in February and rise to 2.5% on an annual basis.

Currently, the short-term forward-looking indicator is priced in the inflated market not reflecting the 2.5% to 3% PCE inflation period, which is roughly equivalent to the 3%-3.5% rate in the consumer price index, according to Pimco economist Tiffany Wilding. Furthermore, the breakout rate for the 5-year and 10-year periods, reflecting the market's long-term expectations for inflation, is hovering around 2.3% to 2.4%, slightly higher than the Federal Reserve's 2% target.

From a more short-term perspective, some domestic US factors may increase price pressure. With the arrival of the summer months, gasoline price settings have risen, making the possibility of the national average price reaching $4 per gallon a topic of debate. Meanwhile, analysts have been evaluating whether the collapse of the Baltimore Bridge this week could worsen supply chain disruptions.

Mark Heppenstall, chief investment officer at Penn Mutual Asset Management in Horsham, Pennsylvania, said, “I really think the Federal Reserve created a problem for itself by making financial conditions so easy.” The company managed more than $34 billion in assets as of February 29.

Investment-grade and high-yield credit spreads, as well as stocks trading at or near historic highs, point to sufficient liquidity. Policymakers “cannot afford another mistake of underestimating inflation because their credit will be at risk,” Heppenstall said over the phone.

On Thursday, US Treasury yields ended with their biggest quarterly increase in at least six months. Meanwhile, the Dow Jones Industrial Average and the S&P 500 set new closing records.