The US CPI released last night came in below estimates providing further momentum to the interest rate peak in the making. Within a few hours, the FOMC meeting minutes were announced that disclosed two important things. One is that members now estimated a mild recession in the later part of 2023. Second is that many of them were in favour of a pause before voting for a hike.
Does this mean inflation worry is over for the Federal Reserve? Not as quickly as markets anticipate. With the fall in US CPI came a fall in odds of a rate hike in May from 73% to 65%. Accompanied by three rare cuts by year-end. Even JP Morgan and Goldman Sachs revised to only one rate hike in May.
The problem is that Federal Reserve is more focused on Core CPI which was still higher than estimates. Also, the focus is on service inflation which is higher as well due to an increase in rents.
The big relief was driven by the energy segment especially piped gas as US natural gas prices were much lower. But in recent weeks this has stabilised while crude oil is near $90/bbl.
All these elements along with financial conditions tightened might bring in a pause but any reversal to inflation in the second half of the year would risk a bigger volatility rise.