In a setback for the Federal Reserve's hopes to lower interest rates this year, inflation figures in March showed unexpectedly strong pressure. Consumer prices rose by 3.5% compared to the previous year, which was above forecasts. This makes it more difficult for the central bank to justify rate cuts without signs of a significant economic slowdown.

Inflation data raises questions about whether the Fed will be able to cut interest rates this year, especially as the economy remains solid. Some economists and Fed officials had hoped that inflation would gently return to the 2% target without putting too much strain on the labor market. However, the latest data could mean that inflation is settling at a level closer to 3%. Without clear signs of an economic slowdown, this could mean that interest rate cuts may not happen at all.

Central bank officials familiar with the situation had originally hoped that a series of interest rate cuts would be possible to achieve a so-called soft landing. However, the persistently high inflation could now prevent this. The latest figures suggest that the Fed might maintain its interest rates, which are currently at their highest level in 23 years, at the current level for several more months.

Investors have adjusted their expectations and now see Federal Reserve interest rates at around 5% by year's end, which implies only one or two quarter-point cuts this year. Markets responded accordingly with a decline in stocks and an increase in yields for U.S. Treasury bonds.

The Fed itself has emphasized that its policy decisions depend on the totality of economic data and not on a single data point. However, inflation data is playing an increasingly larger role in their decision-making, especially as the economy continues to appear robust. The decision on interest rate cuts now depends on whether inflation starts to fall again or if signs of economic slowdown appear.