The case for an interest rate hike pause in June just got stronger.
Prices rose at their slowest annual pace in two years in April, according to the latest data from the Bureau of Labor Statistics released Wednesday. The Consumer Price Index (CPI) revealed headline inflation rose 0.4% over last month and 4.9% over the prior year in April, slightly under economist expectations per Bloomberg consensus data and down from a 5.0% yearly increase in March.
The 10th-straight month of headline inflation declines has Wall Street betting Jerome Powell and the Federal Reserve will pause the most aggressive interest rate hike cycle in four decades at its next meeting in June.
"We expect the FOMC to maintain the federal funds rate at its current level for the foreseeable future and for inflation to slow further in the months ahead as supply pressures continue to ease and demand growth weakens," Wells Fargo's team of economists wrote on Wednesday.
Markets agree. After pricing in a roughly 78% probability of a pause prior to the CPI release, markets are now pricing a 97% chance of a rate hike pause in June, according to the CME Fed Watch tool.
Federal Reserve Chair Jerome Powell signaled what some Wall Street economists considered a “hawkish pause” during his press conference on May 3. While Powell didn’t close the door on future rate hikes, he pointed to key phrasing the Fed removed from its statement about anticipating more rate hikes.
The Fed hiked rates by 0.25% at the May meeting, marking the 10th consecutive hike in the cycle. The central bank's new benchmark policy rate, the fed funds rate, is now in a range of 5%-5.25%, the highest since September 2007. But as rising rates have tightened credit conditions, investors are now waiting for the moment when the Fed will pause its path and let the impact of higher rates take hold.
In a note titled “supportive of a pause,” Bank of America’s team of economists point to several underlying factors inside the report that are constructive for the Fed’s fight against inflation.
“This is an encouraging print for the Fed,” BofA wrote. “The broad-based deceleration, and concerns about used cars (were) offset by the fact that wholesale prices are falling again. This report should keep the Fed comfortable with a hold in June. However, note that we have one more jobs report and one more inflation print before the June meeting.”
Stocks closed modestly higher on Wednesday, as a confluence of other factors, including regional banking turmoil and a looming debt ceiling X-date dominate investor sentiment.
To be sure, core inflation, which strips out food and energy prices, remained sticky last month. On a core basis, prices in April climbed 0.4% over the prior month and 5.5% over last year.
Still, the print was a win for the bulls, according to Fundstrat head of research Tom Lee.
“Markets have become a “game of inches” (from Any Given Sunday 1999) and each incoming data point barely moves consensus viewpoints, “Lee wrote on Wednesday, referring to a Al Pacino's famous movie line about the significance of small details. “Today’s report is not a tie breaker. There are signs of progress on inflation, but then again, there is the same volatility in components that would argue inflation is lingering. But overall, we see the ground gained by those bullish.”
Josh is a reporter for Yahoo Finance.
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