Slowing US Inflation Boosts Chances for Fed Rate Pause

Markets are now pricing in a 91.9% probability on a Federal Reserve rate pause after it closes a two-day policy meeting later this week, as the US inflation hit two year low in May, CME Group’s FedWatch Tool showed on Wednesday. 

In May, the Consumer Price Index (CPI) in the United States increased by 4% from a year earlier, the smallest increase since March 2021. Inflation in core services (which excludes housing) has slowed to its lowest rate in 15 months, an outcome that many economists consider as a positive sign for the future.

With inflation falling further in the US, the markets have taken note of the details that suggest this may give the Federal Reserve more room to pause from raising interest rates at its meeting later this week.

Despite inflation remaining well above the central bank’s 2% target, the Fed is on track to skip a rate increase, especially after the inflation came in as expected, when it concludes a two-day policy meeting later today, marking the end of a 10-hike streak.

“This CPI report is everything the Fed needs to pause – there is deflation and/or disinflation in every category,” Jamie Cox, managing partner at Harris Financial Group, said in a note. “If this trajectory holds in June, the need for further tightening is behind us.”

However, there is still a more than 60% chance that the central bank will resume raising rates, perhaps by 25 basis points in July.

For now, the consensus among analysts is that the Fed will keep rates unchanged on Wednesday; however, the Fed’s next move will not be known until the July inflation report is out.