The May consumer price index, the freshest reading on inflation that the Federal Reserve will see before its policy meeting next week, won’t be enough to convince them to surprise markets and cut interest rates, economists said Wednesday.
The May CPI data was fairly soft, with core inflation over the past year declining to 2% in May from the 2.1% reading in April and a 2.4% reading last July.
Scott Brown, chief economist at Raymond James, a financial advisory firm based in St. Petersburg, said he was sticking to his July rate cut call after the CPI data.
While the low inflation data gives the Fed “cover” to move, the Fed’s monetary policy decisions actually may hinge on “what happens on trade,” Brown said.
The Fed is expected to wait until after the G-20 summit in Japan on June 28-29, where President Donald Trump is expected to meet China’s President Xi Jinping.
Sal Guatieri, senior economist at BMO Capital Markets in Toronto, agreed.
“The reason the Fed is likely to hold off is to see the outcome of U.S. China trade talks over the next month or so,” he said.
Low inflation isn’t enough by itself to get the Fed to move, Guatieri said. The central bank has to also have an assumption the economy is losing momentum and that the toll of trade tariffs on the economy will likely mount, he said.
Mike Pearce, senior U.S. economist at Capital Economics, said low inflation doesn’t seem to be a big factor in driving their decisions.
He said it was striking how much Fed officials are pointing to an alternative inflation measure, the Dallas Trimmed Mean, that shows inflation at the central bank’s 2% target.
The Fed’s preferred target is based on the personal consumption expenditure price index, which generally runs a half a percent below the CPI data.
U.S. Treasury yields extended their fall after the May core consumer price gauge fell short of expectations.
The 10-year Treasury note yield
was down 2 basis points to 2.122%.
The Fed will announce its policy decision in one week followed by a press conference by Fed Chairman Jerome Powell.
The market sees only a 23% chance of a June rate hike, according to CME Group’s FedWatch tool. Investors overwhelmingly think the first move will come at the following Fed meeting on July 30-31.
Some economists have argued a June move would inject a positive surprise.
But others disagree.
“I think it [a June move] would signal the Fed is starting to panic and that they see something others are not,” Pearce of Capital Economics said.