U.S. Core Inflation Cools, Bolstering Case for Fed Rate Cut

Powell Trump

U.S. President Donald Trump announces the nominee for Federal Reserve Chair Jerome Powell. , Bloomberg News

So it is somewhat vindicating that Fed Chairman Jerome Powell seems to be finally coming around to that idea.

A much-anticipated pick-up in inflation is yet to materialize in a post-financial crisis world, to the bewilderment of economists and policymakers alike, and was a key factor in prompting the Fed to pause its rate hikes at the start of the year. There's no reason the Fed shouldn't consider using it - if it needs to. Its rhetoric and tortured logic confuse everyone.

USA consumer prices barely rose in May, pointing to moderate inflation that together with a slowing economy increased pressure on the Federal Reserve to cut interest rates this year.

The Fed will hold a meeting of its open market committee next week and it is unlikely it will announce a rate cut there.

Capital flows tend to move in the direction of the most advantageous or improving returns, with lower rates normally seeing investors driven out of and deterred away from a currency while rising rates have the opposite effect.

FedWatch tool CME stated that around 65 % of the market expects interest rate cuts at July meeting of Federal Bank.

The economy will weaken in 2019.

"We obviously feel more confident that they're going to be easing, " JPMorgan Chase & Co. chief USA economist Michael Feroli said after news on Friday that payrolls growth slowed abruptly in May.

This is the textbook response to a period of strong economic growth, because reining in the boom helps to limit the severity of the inevitable bust that occurs at the other end of the business cycle. In other words, he believes there is an inflation-employment trade-off. The focus has been economic growth and the job creation that attends it. The greenback hit its lowest since late March on Monday as expectations grow that the Fed will soon cut rates.

Compared to May of a year ago, United States consumer prices are up 1.8%, slowing from the 2% increase in April. The month-on-month rate is expected at 0.1%, down from 0.3% in April, while core CPI is forecast to remain unchanged at 2.1% y/y. The same thing happened after the Reagan tax cuts in 1981. But the prices for prescription medication fell 0.2 per cent.

Those odds have increased dramatically in recent days as below-target inflation, signs of a cooling labor market, and trade tensions clouded the outlook.

A survey of chief executive officers published on Wednesday showed unease about trade policy negatively impacting sales expectations as well as capital spending and hiring plans over the next six months.

Above: Bureau of Labour Statistics table of US inflation rates.

More recently, Venezuela and Zimbabwe have tried to create prosperity by printing money, and it only added to their economic miseries. As a result the hopes for interest rates cuts that have been priced in are being priced out again. There is no sign of inflation anywhere in the economy today. The dollar is set to maintain its strength for the rest of this year but will come under pressure from the trade war and eventual Fed rate cuts.

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