For now, the market is celebrating the sharp divergence between expectations and reality on inflation by buying more risky assets and selling the dollar. Interest rate futures are already pricing in a 40% chance that the Fed will leave rates at current levels in early May. This is still not a critical reversal, as a week and a month ago, these odds were over 50% (and on 13 March, there was an 18% chance of a cut).
This problem is receding into the background, and the Fed’s focus can now turn to wages and prices in the service sector. So far, the only solution to this problem is a drastic economic growth slowdown. This is probably related to the Fed’s expected moderate inflation this year. This could signal that the central bank will put the brakes on monetary policy, contrary to market expectations.
Last month, US inflation fell more than expected due to cheaper energy and food. The CPI rose 5%, down from 6% the previous month and just below the expected 5.1%. We had warned of this possibility.
This problem is receding into the background, and the Fed’s focus can now turn to wages and prices in the service sector. So far, the only solution to this problem is a drastic economic growth slowdown. This is probably related to the Fed’s expected moderate inflation this year. This could signal that the central bank will put the brakes on monetary policy, contrary to market expectations.
Last month, US inflation fell more than expected due to cheaper energy and food. The CPI rose 5%, down from 6% the previous month and just below the expected 5.1%. We had warned of this possibility.