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May Inflation Number, Fed Interest Rate Decision Highlight Economic News | Economy

May Inflation Number, Fed Interest Rate Decision Highlight Economic News | Economy

A year ago, the leading measure of inflation hit 8.6% on its way to a peak of 9.1%, prompting howls from politicians and economists alike.

On Tuesday, the Labor Department is expected to announce that inflation was 4.1% last month, still way above what the Federal Reserve’s goal of 2% but a significant decline nonetheless. If the consumer price index comes in as expected, it will be the lowest monthly reading since March 2021.

That has markets expecting that when the central bank concludes its two-day meeting on Wednesday, it will leave rates unchanged as it decides what to do next in its battle against inflation.

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The CPI and Fed meeting dominate the week’s economic news and have the chance to roil markets that are also digesting the ramifications of the debt ceiling deal and the unprecedented federal indictment of a former president.

Political Cartoons on Inflation

The Dow Jones Industrial Average ended Friday up 43 on a day when the Justice Department indicted former President Donald Trump on multiple counts of mishandling classified and national defense documents. The S&P 500 index posted its fourth straight week of gains, meanwhile, and has now recovered the 20% decline of October that signaled a bear market.

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The question now is whether a pause from the Fed means an end to its tightening cycle or if another increase is coming in July. The Fed has raised interest rates 10 times in the past year amid the most aggressive policy tightening campaign since the 1980s.

Markets are anticipating the Fed will cut rates later this year as the economy cools and inflation recedes. But, Vanguard senior economist Asawari Sathe said on Friday that is unrealistic.

“We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%,” Sathe said in a client note. “In that scenario, the Fed cutting its policy rate this year is unlikely.”

Vanguard estimates it will be the middle of 2024 before the central bank could be in a position to reduce interest rates.

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“Our model suggests that it’s nearly three times as likely that the Fed will raise its target for the federal funds rate or keep it on hold this year than that it will cut rates,” Sathe said. “Our model’s output underscores our conviction that the Fed’s fight against inflation hasn’t yet reached an inflection point.”

The economy has been flashing mixed signals of late, with a resilient labor market and a consumer who has grown more cautious about spending but has not yet withdrawn from shopping.

“Given the mixed messages, the Fed appears to deem it prudent to back off the recent rate tightening campaign and assess the economic situation before deciding if any more action is needed to achieve the FOMC’s inflation goal,” Sam Bullard, managing director and senior economist at Wells Fargo Corporate and Investment Banking, wrote on Sunday.

“Assuming (the Fed’s Open Market Committee) leaves rates alone this week, there is a meaningful chance that the committee will hike another 25 bps in July, which is our current call,” he added.

The week will also see readings on producer prices and retail sales for May, as well as preliminary takes on consumer sentiment for June.

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Tim Smart

Published: 2023-06-12 13:09:41

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