US headline inflation slowed to 4% in May, its lowest annual level since March 2021, increasing the chances that the Federal Reserve (Fed) will pause interest rate hikes at Wednesday’s meeting.
Month-on-month headline Consumer Price Index (CPI) rose 0.1%, falling 0.3% short of analysts’ estimates, further strengthening the rate pause narrative.
Price Pressures in PCE and Core CPI Suggest July Hike
Earlier this week, futures markets predicted with a 78% probability the Fed would keep interest rates at 5-5.25% as unemployment increased from 3.4% in April to 3.7% in May.
Since the release of the CPI, the probability of a pause has increased to 94%.
The Fed has increased rates 10 times since March 2022 to induce price stability after keeping rates at zero and buying government bonds to stimulate the US economy.
Now, markets hope the rate increases will pause in June as several key indicators suggest the economy is cooling.
However, the Fed’s preferred inflation gauge, Personal Consumption Expenditure Index (PCE), has not responded as favorably to rising rates as its relative, the CPI.
PCE grew at an average of 4.3% over the past three months, while wages grew 0.3%. Additionally
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Author: David Thomas
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