Upbeat inflation data released on the morning of the Federal Reserve’s latest policy announcement has economists feeling optimistic about the central bank’s statement, and Fed Chairman Jerome Powell’s press conference may be more dovish than initially expected.
The May Consumer Price Index (CPI) showed the lowest annual rate of increase in consumer prices since July 2022. Overall, the figures showed a more moderate inflation reading than economists had expected.
Michael Feroli, JPMorgan’s chief U.S. economist, believes the “magnitude” of these surprises could change how the “dot plot” that shows policymakers’ forecasts of future interest rate movements looks at 2 p.m. Eastern time.
“We thought this year was on the brink of a median drop or two,” Feroli wrote in a client note. “If participants are proactively updating their dots (as they are allowed to do), that should increase the likelihood of a median drop two times.”
Feroli added that the inflation data will likely lead the Fed to remove a sentence from its May statement that read, “In recent months, we have not made further progress toward the Committee’s 2 percent inflation objective.”
While Powell may not directly mention it, other economists have argued that given Wednesday’s positive inflation data and the recent spike in the unemployment rate, the Fed should be closer to cutting interest rates to minimize damage to the labor market.
“The unemployment rate increased by 0.6%. [percentage points] Down from a low of 4.0% in March [summary of economist projections] “Core inflation has moderated, rising two quarters sooner than expected,” Neil Datta, head of economics at Renaissance Macro, wrote in a note on Wednesday. “As a rough guide, we would expect core PCE to end the month at 0.1%.”
“You don’t have to be a rocket scientist to understand what to do: it’s time to start recalibrating monetary policy,” he added.
