In our previous edition, we mentioned the possibility of a weaker Fed ‘put’ in the US.
Why? Pandemic-driven high inflation experience and elevated price levels, with inflation still above the 2% target. The chart above depicts the significant jump in inflation, across the board, in the five years after the onset of the pandemic vs. the previous five. Headline and Core CPI inflation doubled, while food and energy picked up much more. More recently, inflation has moderated but price levels remain elevated. Headline CPI level in end-2024 was 14% higher than what it would have been, if 2020-2024 CAGR was equal to that during 2015-2019.
What does this mean? Inflation is still somewhat elevated vs. target. March 2025 headline CPI was 2.4% y/y and Core-CPI was 2.8%. The Fed’s job to return inflation to its target is not done. This does not mean the Fed will not cut rates to support growth. In fact, market’s rate cut expectations have risen post the tariff related announcements in early April. It simply means the bar for a ‘whatever it takes’ response from Fed is likely higher this time, vs. previous downturns.
Source for the chart: CEIC, Bandhan MF Research. Note: 1) CPI – Consumer Price Index, 2) CAGR – Compound Annual Growth Rate, 3) Core CPI refers to headline CPI excluding food and energy.
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