The CME Fedwatch tool reported a significant decrease in the expectations for a June rate cut by the Federal Reserve. Traders are now pricing in only a 17.5% chance of a 25 basis point rate cut, a sharp decline from the 61.1% probability last week. On the other hand, the likelihood of a rate hold has more than doubled to 81.8% from 37.1% last week. This shift is a result of the hotter-than-expected inflation data and the hawkish minutes from the central bank's March meeting.
The consumer price index data revealed that inflation grew more than anticipated in March, surpassing expectations for the fourth consecutive month. This data suggests that the previous trend of declining inflation may be slowing down, with inflation expected to remain well above the Fed's 2% annual target in the coming months. Factors such as rising commodity prices, particularly in fuel, and strong consumer spending have contributed to the higher inflation print. The persistence of these factors, along with tensions in the Middle East affecting oil prices, are likely to continue influencing inflation in the near future.
The minutes from the Fed's March meeting indicated that officials were already expressing concerns about sticky inflation before the recent data release. Some officials even suggested the need for higher interest rates for a longer duration and proposed the possibility of additional rate hikes. With several Fed officials emphasizing sticky inflation as a major concern, it is expected to delay any potential rate reductions this year. This cautious approach towards interest rates reflects the Fed's commitment to addressing inflationary pressures effectively.
Following the release of the inflation data and the hawkish tone in the Fed's minutes, the dollar index surged to a near five-month high, while 10-year U.S. Treasury yields also reached five-month peaks. Conversely, risk-driven assets experienced a decline, with the S&P 500 losing nearly 1% on the same day. This market reaction underscores the impact of economic data and central bank communications on investor sentiment and asset prices. As uncertainties persist regarding inflation and interest rate policies, market participants are likely to closely monitor future economic indicators and official statements from the Federal Reserve.