CPI inflation ticked lower in April with the all-items (headline) inflation rate nudging down to a year-over-year 4.9%. The core rate, which excludes food and energy prices, also slipped lower to a year-over-year 5.5% from a 5.6% rate in March.
On a month-to-month basis all-items inflation rose by 0.4% in April from March after a 0.1% gain in March. The core rate rose 0.4% in April after rising 0.4% in March.
If you were looking to have this morning’s inflation report settle the argument on when the Federal Reserve would pause its interest rate hikes, this report didn’t deliver. The most likely Fed reaction to this data would be a pause at the June 14 meeting that left the Fed’s benchmark short-term interest rate at the current 5% to 5.25% range.
The CME Fed Watch Tool, which tracks prices in the Fed Funds Futures market, calculates that market participants believe that the Fed will hold rates steady at that meeting. Odds are 93.9% on the Fed Watch Tool in favor of no change in rates at the June 14 meeting.
I can see the logic of that. Inflation is coming down–albeit at an antagonizing slow pace–and given other dangers to the economy from uncertainty over the debt ceiling and from stress at regional banks, there is an argument that the Fed will decide to play it safe and not risk a recession as past interest rate increases continue to work their way through the economy. Of course, you could also argue, persuasively, that given the very slow pace at which inflation is falling that the Fed will opt for one more hike and pause only after a June increase. Frankly, I’d find the June pause argument more convincing if it in advancing that opinion Wal Street wasn’t arguing for its own book. But still, self-interest isn’t always wrong.
My point, though, is that this data doesn’t reveal enough of an inflation trend to seal the case on when the Fed will pause.
And the numbers certainly didn’t make a strong case for a quick pivot to interest rate cuts by the Fed. This report, I’d argue, makes a strong case that interest rate cuts won’t come in 2023 or until the Fed sees signs of a more serious-than-desired recession.
The market today reacted with a degree of cautious optimism.
The Standard & Poor’s 500 closed 0.45% higher and the Dow Jones Industrial Average edged lower by 0.09%. The NASDAQ Composite ended the day up 1.09% and the small-cap Russell 2000 index gained 0.56%. Investors and traders saw no reason to add to their hedges on this news and the CBOE S&P 500 Volatility Index (VIX) fell 4.69% to 1688.
