Investors are awaiting the consumer-price index data due Tuesday, one day before the Federal Open Market Committee concludes its meeting on Wednesday.
The consensus is that the Fed will keep its interest rate unchanged at the conclusion of this week’s meeting. Fed fund futures traders are pricing a 76.9% likelihood that the Federal Reserve will keep its interest rate stable this week, leaving the main policy rate target in the range of 5% to 5.25%, according to the CME FedWatch tool.
But that could change, if the May inflation numbers arrive hotter than expected, some analysts said.
Economists polled by The Wall Street Journal forecast a 0.1% increase in the May CPI, which would slow the year-over-year rate to 4% from 4.9% in April. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.4% in May, with the year-over-year rate at 5.3% versus 5.5% in April.
The May inflation data is particularly important as it “will be the final inflation measure the Federal Reserve reviews before announcing its rate hike decision on Wednesday,” Brent Schutte, chief investment officer at the Northwestern Mutual Wealth Management Company, wrote in emailed comments Monday.
If the core inflation numbers arrive higher than anticipated, “I think we’ll see chances move much more closely to a coin toss for the Federal Reserve to hike on Wednesday, and then people who are expecting a kind of halt will dial back their expectations,” Giles Coghlan, chief market analyst at HYCM, said in a phone interview.
Last week, Canadian, Australian central banks both delivered unexpected rate hikes, citing a sticky inflation backdrop and resilient job markets.
Padhraic Garvey, ING’s head of global debt and rates strategy, echoed Coghlan’s point. While it is most likely that the Fed will keep its interest rate unchanged this week, if the core CPI sees a “shock” 0.5% increase in May, “that could be sufficient to convince enough FOMC members to vote for a hike,” Garvey said.
“The Fed wants to see 0.2% month-on-month or below CPI readings to be confident inflation will return to 2%,” Garvey wrote in a recent note. “We aren’t there yet so if they do hold rates steady [in June], as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow – July is clearly a risk.”
Some Fed officials recently said that they were leaning toward skipping an interest-rate increase in June, but didn’t rule out rate increases in following meetings.