Investors still betting on another rate hike after cooler-than-expected inflation report
Zachary Halaschak
Video Embed
Investors still expected the Federal Reserve to hike interest rates at its next meeting, despite the news that inflation fell more than expected.
Inflation fell to a 3.8% annual rate in May, as measured by the personal consumption expenditures price index, which is the gauge favored by the Fed. Most forecasters had actually expected annual inflation to tick up slightly rather than to fall from the 4.6% rate it was running at in April — good news for the economy.
GOP SHIFT FROM FREE TRADE IS IRREVERSIBLE, TRUMP TRADE REPRESENTATIVE LIGHTHIZER SAYS
On a monthly basis, inflation also beat expectations, rising just a tenth of a percentage point. That is less than forecasts that expected it to tick up by 0.5%.
Still, the better-than-expected report hasn’t changed investors’ minds about the Fed hiking rates again at its July meeting. During its June meeting, members of the Federal Open Market Committee opted to pause rate hikes, the first such pause since the central bank began raising rates in March of last year. Although, the Fed, led by Chairman Jerome Powell, indicated that more hikes were likely following the meeting.
As of Friday, investors assigned about an 87% chance that the Fed will raise the rate in July, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
Brian Marks, executive director of the University of New Haven’s Entrepreneurship and Innovation Program, said that the Friday numbers are consistent with the downward trend in inflation since it peaked in June of last year but still thinks the Fed will raise rates again come July and perhaps even a second time during its September meeting.
“It’s continuing the trend, but it still shows there is more work to do. Certainly the Fed is taking a data-driven approach … but I do not think the latest numbers will result in the Fed retracting that which it said when it paused,” Marks told the Washington Examiner, referring to the central bank’s signaling of another rate hike this year.
The Fed’s target rate is now sitting at 5% to 5.25%, the highest it has been since the financial crisis in 2008. Most investors expect that target to crest at 5.25% to 5.50% this year, although they imply about a 20% chance that the peak rate this year will clock in at 5.50% to 5.75% following the Fed’s September meeting.
This week brought a slate of other positive economic news as well.
The Bureau of Economic Analysis announced on Thursday that first-quarter gross domestic product growth clocked in at a 2% annual rate, adjusted for inflation, a major upward revision from the previous estimate of 1.3%.
Declining GDP is the biggest indicator of an economic downturn or recession. Typically, two back-to-back quarters of negative GDP growth are indicative of a recession. So, the fact that the GDP was positive in the first quarter is welcome news to economists, many of whom were predicting just months ago the country might be in a recession by now.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
The country’s labor market has also remained surprisingly resilient despite the Fed’s barrage of rate hikes.
The economy far surpassed expectations in May and notched 339,000 jobs while the unemployment rate crept up slightly to a still-low 3.7%. Job openings also unexpectedly increased in April, rising to above 10 million for the first time since January, showing that employers are still looking for workers to hire.