A promising inflation reading on the morning of the Fed’s latest policy announcement has economists feeling optimistic about the central bank’s statement, and Fed Chair Jerome Powell’s news conference may lean more pessimistic than initially expected.
The Consumer Price Index (CPI) for May showed the smallest annual increase in consumer prices since July 2022. Across the board, the publication showed slower inflation measures than economists had expected.
Given the “magnitude” of these surprises, Michael Feroli, chief US economist at JP Morgan, believes the data could change how the “dot plot”, which plots policymakers’ expectations about the direction interest rates could head in the future, looks. At 2 p.m. EST. .
“We thought it was a close call between the middle point showing one or two easings this year,” Feroli wrote in a note to clients. “If participants actively update their score, as they are allowed to do, this should increase the odds of getting a two-bit midpoint.”
Feroli added that the inflation data would likely prompt the Fed to remove the sentence from its May statement that said: “In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation target.”
While Powell may not mention it directly, other economists opined that given Wednesday’s positive inflation data and the recent rise in the unemployment rate, the Fed should be close to cutting interest rates to ensure minimal damage to the labor market.
“The unemployment rate has increased by 0.6 [percentage points] From its lowest levels to 4.0%, reaching the month of March [summary of economist projections] “Estimate is two quarters ahead of schedule and core inflation has eased,” Neil Dutta, head of economics at Renaissance Macro, wrote in a note on Wednesday. “A rough rule of thumb is to assume 0.1% on core personal consumption expenditures at the end of the month.
“It doesn’t take a rocket scientist to know what to do,” he added. “It is time to start resetting monetary policy.”
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