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The Fed's only possible reason to raise rates is vanishing

janet yellen glasses
janet yellen glasses

(Federal Reserve Chair Janet Yellen testifying before the Senate Banking Committee on Capitol Hill in Washington on February 14.Andrew Harnik/AP)

The Fed's June rate hike is suddenly sliding off the table.

Market expectations for a June interest-rate increase from the Federal Reserve have fallen to just 47%, down from 66.5% only a week ago, according to Bloomberg's World Interest Rate Probability data.

What happened? The possibility that inflation was finally moving higher, which had been the main justification for the central bank's stated desire to push interest rates higher, suddenly disappeared as consumer prices fell in March for the first time in over a year. Core prices, which exclude food and energy costs and are closely watched by Fed officials, also slipped 0.1%, making for their first decline since January 2010.

At the same time, US retail sales, a key barometer of growth for an economy two-thirds reliant on consumer spending, fell for a second straight month.

The two reports arrived after employment data came in much weaker than expected and amid concerns that first-quarter economic growth was at best tepid.

The Atlanta Fed's GDPNow forecasting tool sees first-quarter gross domestic product expanding at a paltry 0.5% annualized rate.

Put another way: The US central bank seems stuck in an annual ritual of starting the year off with overly optimistic expectations only to temper them as reality catches up with forecasts. At this point it's more "Groundhog Day" than mere déjà vu.

In 2016, the Fed started the year talking about four rate hikes. It raised rates once, in December. This year, it has been mulling a similar number. It hiked the fed funds rate in March and nodded to a few more this year. But now that prospect is looking dimmer.

"If the data stay like this, I don't think they hike at the June meeting," Ethan Harris, an economist at Bank of America Merrill Lynch, said on Bloomberg Television. "Bonds are reasonably priced, but there are some risks to the equity market."

Treasury yields, which move opposite to their price, have been sliding as investors worry President Donald Trump's economic agenda may already be falling by the wayside as diplomatic concerns take center stage and react to the failure of Trump's attempt to overhaul the US healthcare system.

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