The March consumer price inflation report was released on Wednesday by the Bureau of Labor Statistics. The report displayed higher-than-expected inflation readings for both headline and core inflation. The headline monthly increase in inflation was 0.4%, and the core reading, which strips out food and energy, was also 0.4%. With the new information, consumer price inflation is running at 3.5% on a 12-month basis. That’s well above the Federal Reserve‘s 2% inflation target. 

Market expectations of the first interest rate cut by the Federal Reserve are now being pushed out from the Jun. 12 meeting of the Federal Reserve’s Open Market Committee, FOMC, its rate setting group, to the FOMC’s Sept. 18 meeting. 

Still, the market is too pessimistic about the outlook for interest rates. There is growing evidence that the economy is slowing and that the labor market is weakening. Members of the FOMC would be well advised to look forward and not at past data. Monetary policy affects the economy with a long and variable lag. Researchers at the Federal Reserve Bank of San Francisco recently published a paper explaining that the substantial and aggressive tightening of monetary policy by the FOMC have yet to affect the economy.

Credit card rates are high, reaching 22.8% on average this month. Rates for auto loans are elevated, nearing 9%.  Prices for new and used vehicles fell in March. Credit card delinquency rates are rising.  Lower-income households are beginning to experience financial distress. Retailers that are particularly reliant on lower-income consumers are reporting more difficult business conditions. Very high mortgage rates are weighing heavily on the residential housing market. Energy prices are also a reason to be cautious about the economic outlook. Oil prices in the U.S. are up 19% year to date.

Oh, and prices at the pump are up almost 6% over the past four weeks and are projected to reach $4 a gallon this summer. That matters because high gasoline prices are an implicit tax on consumption. High gasoline prices damage consumer confidence. 

Most importantly, there are early signs that the resilient labor market is weakening. The employment indexes of both the manufacturing and services sectors were in contraction for March. Small business confidence is at an 11-year low. There is growing angst in the labor market with workers becoming apprehensive about their job prospects. Clearly, the labor market is fragile. The unemployment rate has already increased to 3.8% from 3.4%.

Under the Sahm Rule of the labor market, when the unemployment rate increases by 0.5%, then labor weakness accelerates, and a recession occurs. An economic slide becomes an avalanche.

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The Federal Reserve wants a soft landing and will be patient about reaching its 2% inflation target. Monetary policy is very tight, two or three percentage points above, where policy neither stimulates the economy nor restricts growth. The Federal Reserve does not want a very tight monetary policy to cause a recession.

In turn, as I argued early last month, the central bank will cut rates soon to prevent a hard economic landing, a recession.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note.