Tuesday’s consumer-price index report for May brought some welcome signs of easing U.S. inflation for investors, along with a more complicated task for the Federal Reserve and Chairman Jerome Powell.Readings on core CPI gauges, which strip out food and energy to present a purer read on inflation, are still likely too hot for policy makers who have a 2% inflation objective. The monthly core rate rose by 0.
“The Fed will struggle to sound credibly hawkish if it pauses on Wednesday, given the fact that policy makers have been data dependent,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York. “The data continues to suggest the labor market is still hot and that core inflation is still very strong. It will be difficult for the Fed to communicate a pause and restart rate hikes later on, and will be a very complicated message to send to investors.
As of Tuesday afternoon, all three major U.S. stock indexes DJIA SPX COMP were higher after May’s inflation data reinforced investors’ expectations that the Fed will take no action on Wednesday. Meanwhile, Treasury yields were mixed: the policy-sensitive 2-year rate TMUBMUSD02Y jumped to 4.68%, leading an advance in most rates through the 30-year maturity TMUBMUSD30Y , while 1-month through 6-month T-bill rates all dropped.
The possibility of the Fed also being forced to resume hiking after skipping one or two meetings is a “very likely scenario,” said Jeffrey Cleveland, director and chief economist at Payden & Rygel, a Los Angeles-based investment management firm that oversees almost $150 billion in assets.
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