Fed gets room to hold rates in June amid signs inflation cooling

New York: Signs of moderating price pressures in April will give Federal Reserve officials room to pause their aggressive tightening campaign next month, though inflation is still running too hot for policymakers to consider cutting interest rates.

The consumer price index rose by 4.9% from a year earlier, the first reading below 5% in two years, a Bureau of Labor Statistics report showed Wednesday. Excluding food and energy, the so-called core consumer price index also cooled slightly. But perhaps more importantly for the Fed, the report showed a smaller increase in some key service costs, as airfares and hotel costs declined.

"A quick read would indicate a tilt towards some potential further tightening of monetary policy," said Gregory Daco, chief economist at EY. "But if you lift the cover and look at the underlying details in this report, actually they mostly point towards the higher likelihood of a pause."


Markets are still looking for the Fed to cut rates later this year, amid fears that tightening credit in the wake of a string of bank collapses will lead to a marked economic slowdown. But Wednesday's data suggest officials are still a ways off from declaring victory over inflation.

"While the April CPI report isn't exactly reassuring, it also won't jolt Fed officials into signalling another rate hike in June, given their expectation that the full disinflationary impact from tighter credit conditions has yet to show up," said Anna Wong, chief US economist for Bloomberg Economics. "However, the slow progress in reducing core inflation highlights how unlikely it is that the Fed will cut rates this year."

On Wall Street
The US Treasury yields fell while the Nasdaq jumped as much as 1.17% to its highest intraday level in more than eight months, with large-cap tech stocks including Apple and Microsoft up about 0.6% and 1%, respectively.

Fed funds futures traders are now pricing in a pause in rates in the central bank's June meeting, and less than a 10% chance of another 25 basis points hike.

At 12:07 p.m. ET, the Dow Jones Industrial Average was down 136.11 points, or 0.41%, at 33,425.70, the S&P 500 was up 2.17 points, or 0.05%, at 4,121.34, and the Nasdaq Composite was up 69.54 points, or 0.57%, at 12,249.09.

The rate-sensitive S&P 500 technology sector index rose 0.9%, while communication services rose 0.2%.

"The market is pricing in a Fed cut beginning this summer. While inflation is decelerating, it's not decelerating at a pace that would justify cutting the Fed funds rate anytime before the fourth quarter of 2023," said Matthew Palazzolo, senior investment strategist at Bernstein Private Wealth Management.

"There are some fairly encouraging signs underneath the surface when you look at the release. That should be viewed somewhat positively by markets, but muted to a certain extent by some of the risks... most notably the debt ceiling issue."

Talks on raising the US federal government's $31.4 trillion debt ceiling entered a new phase on Wednesday as some areas of potential compromise emerged after Tuesday's White House meeting.

Regional bank shares extended declines from volatile sessions last week on concerns about the sector's health.