Sluggish inflation has made the Federal Reserve’s efforts to get interest rates back to normal levels a lot harder.
The Fed is expected to raise interest rates Wednesday by a quarter point, and it has forecast another rate hike for this year. But the recent slowdown in inflation has become a red flag for markets, which doubt the Fed’s ability to hike a second time before year end.
Inflation will already be top of mind for markets Wednesday, even before the Fed’s 2 p.m. statement. The consumer price index is released at 15:30 a.m. ET, as is the latest retail sales report. That CPI report is expected to show that May core inflation was running at an annual rate of 1.9 percent, the same as April. CPI fell below 2 percent in April for the first time since late 2015.
“I don’t think inflation coming off is going to alter the current upward trajectory for rates right now,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “I don’t think we’re going to take one or two rate hikes off the table for the next one or two years. I think they’re going to stick with the game plan.
Rupkey said the markets will be watching both the inflation and retail sales data. Retail sales are expected to rise 0.1 percent, below the 0.4 percent last month.
Bob Doll, chief equity strategist at Nuveen Asset Management, said he expects a rate hike Wednesday, but he, like the market, sees about a 50 percent chance of another hike.
“I think it’s 50-50,” he said. “Maybe there will be more clarity one way or the other that helps us move that 50 percent.”
The markets will also be watching for inflation in both the Fed’s comments and in its forecast. The Fed currently forecasts PCE inflation will be at 1.9 percent this year, and Deutsche Bank’s chief U.S. economist Joseph LaVorgna said that could come down by a tenth of a percent. The Fed forecasts 2 percent for 2018 and 2019, which he expects to remain unchanged.
Source: Bloomberg Pro Terminal
Junior Trader Stefan Panteleev