The case for a pause in interest rate hikes in June has strengthened.
Prices rose at their slowest annual pace in two years in April, according to the latest Bureau of Labor Statistics data released Wednesday. The consumer price index (CPI) showed that headline inflation rose 0.4% from last month and 4.9% from a year earlier in April, slightly below economists’ expectations based on Bloomberg consensus data and down from a 5.0% annual increase in March.
The 10th straight month of falling headline inflation has Wall Street betting that Jerome Powell and the Federal Reserve will pause the most aggressive interest rate hike cycle in four decades when it next meets in June.
“We expect the FOMC to hold the federal funds rate at its current level for the foreseeable future and that inflation will ease further in the coming months as supply pressures continue to ease and growth in the demand is weakening,” Wells Fargo’s team of economists wrote on Wednesday.
The markets agree. After pricing a roughly 78% chance of a pause ahead of the CPI release, markets are now pricing in a 97% chance of a pause in rate hikes in June, according to CME tool Fed Watch. .
Federal Reserve Chairman Jerome Powell has signaled what some Wall Street economists consider a “warmongering pause” during his May 3 press conference. While Powell did not close the door on future rate hikes, he pointed to key language the Fed removed from its statement on anticipation of further rate hikes.
The Fed raised rates by 0.25% at the May meeting, marking the 10th straight hike in the cycle. The central bank’s new benchmark policy rate, the federal funds rate, is now in a range of 5% to 5.25%, the highest since September 2007. But as the rate hike has tightened conditions for credit, investors are now waiting for the Fed to pause and let the impact of rising rates take hold.
In a note titled “in favor of a pause,” Bank of America’s team of economists point to several underlying factors in the report that are constructive for the Fed’s fight against inflation.
“This is an encouraging impression for the Fed,” BofA wrote. “The broad-based deceleration and concerns over used cars (have been) offset by wholesale prices falling again. This report should keep the Fed comfortable with a hold in June. However, note that we have another jobs report and another print on inflation ahead of the June meeting.
Stocks closed slightly higher on Wednesday as a confluence of other factors, including regional banking turmoil and an impending debt ceiling on Date X, dominate investor sentiment.
Admittedly, core inflation, which excludes food and energy prices, remained stable last month. On a basic basis, prices in April were up 0.4% from the previous month and 5.5% from a year ago.
Still, the print was a win for the bulls, according to Tom Lee, head of research at Fundstrat.
“Markets have become a ‘game of thumbs’ (from Any Given Sunday 1999) and each incoming data point barely moves the consensus views,” Lee wrote on Wednesday, referencing Al’s famous movie line. Pacino on the importance of small details. “Today’s report is not decisive. There are signs of progress on inflation, but again there is the same volatility in the components that would make it look like inflation is persisting. But overall, we see the ground being gained by these bulls.
Josh is a reporter for Yahoo Finance.
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