Financial markets reacted positively last week both to declining CPI and PPI inflation and to the Fed pausing its rate increases at least until its next meeting at the end of July. The S&P was up 2.35% for the week.
- The Fed held its Fed funds target rate at between 5.00% and 5.25% to allow officials to “assess additional information and its implications for monetary policy,” but indicated in their updated Summary of Economic Projections (“SEP”) that 50 basis points of additional rate increases are expected before year-end.
- In reaction to Thursday’s stock market enthusiasm, two senior Fed officials issued hawkish warnings on Friday which contributed to markets declining about 1/3% by Friday’s close.
- The new SEP projects GDP growth to be slightly stronger in 2023 and 2024, for the unemployment rate to rise only to 4.1% compared to its prior 4.5% forecast, and for PCE core inflation to end this year at 3.9% versus 3.6% previously forecast.
- The Fed’s message was particularly strong that they will keep after inflation until it is contained, but Fed funds futures markets are encouraged by moderating core inflation and expect the Fed won’t need more than one additional 25 basis point hike in July.
Both headline and core CPI inflation declined in May, which is especially good news after 12-month core PCE inflation had increased in April over March.
- Twelve-month CPI headline inflation fell to 4.0% from 4.9% in April – a two-year low, and core inflation fell to 5.3% from 5.5% in April.
- Core inflation was adversely affected by a 4.4% m/m increase in used vehicle prices and by a 0.5% m/m increase in rent and owner equivalent rent. Both should show significant improvement in June and thereafter.
- The Producer Price Index declined 0.3 percent in May, from a 1.6% decline in prices for goods and an 0.2% increase in services prices. This is good news for how CPI prices can respond in the coming months.
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