May’s CPI reading lets Fed pause hikes
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The U.S. consumer price index for May was mostly great news for traders, who saw it as a sign that the Fed will leave interest rates unchanged at the conclusion of its meeting Wednesday.
Though the annual rate of inflation at 4% is still two times the Fed's target, it's the slowest increase since March 2021. And while there are signs core inflation remains sticky, traders don't seem as worried since it's largely pushed up by an 8% rise in shelter prices. That category tends to not reflect the current rental market because the CPI looks at the rental prices people are currently paying, not the rental prices landlords are asking for now. And RealPage data shows rents are up only 2.3% year over year in May, which might signal further cooling in the upcoming months' CPI.
That leaves room for the Fed to pause its rate hikes. Traders think there's only a 10% chance the Fed will raise rates, according to the CME Group's FedWatch tool. But just as you can resume a show you've paused, so can the Fed return to its regular programming of rate increases. Indeed, Santander's chief U.S. economist Stephen Stanley argues the Fed will pause in June, only to resume hiking in July; BlackRock's head of iShares investment strategy Gargi Chaudhuri thinks the Fed will skip while "signaling at least one further hike by the end of 2023."
Whether the Fed eventually continues its increases depends, of course, on further inflation data. The producer price index comes out later today. While that might be too late to factor into the Fed's June decision, it'll give traders a better idea of whether we're looking at a "pause and play" situation.
Source: CNBC
