The Federal Reserve Will Hold Its 11th FOMC Meeting Since They Began Rate-hikes

Inflation, FOMC Meeting and Rate Hike Probabilities

On the morning of the 13th, the government will release its latest report on inflationary pressures vis-à-vis the CPI (Consumer Price Index). This will be the last important piece of data that Fed officials will use to make their final decisions regarding monetary policy.

While their preferred inflation index is the PCE, the CPI will contain the most recent assessment of inflationary pressures. Inflation was above 9% just one month after the Federal Reserve initiated its first rate hike back in March 2022. In just over a year inflationary pressure has had a strong contraction.

Although the extremely hawkish and restrictive monetary policy of 10 consecutive rate hikes that took the Fed’s benchmark rate to between 5 and 5 ¼% has dramatically lowered inflation but it is still well above the Federal Reserve’s target. Fed members have been waiting for the data to indicate if inflationary pressures are headed toward their goal. However, while headline inflation has had a significant decline the core inflation index which omits food, energy, and housing has remained persistent and sticky between 5% and 6% since December 2022. Housing costs make up a large portion (about one-third) of the Consumer Price Index, and if you strip out food and energy costs housing costs are about 40% of the total CPI index.

Currently, there is an 81.1% probability that the Federal Reserve will initiate its first interest rate hike pause with under a 5 to 1 probability that the Fed will raise rates next week.

The Federal Reserve Bank of Cleveland “Nowcast” provides real-time daily estimates of the PCE and CPI levels. It uses daily oil prices, and weekly gasoline retail prices and combines them with monthly consumer prices to offer a time-sensitive forecast of inflation providing real-time insight.

According to Forbes, “Nowcasts of U.S. inflation for May suggest that headline inflation will slow, but that core inflation will remain well above the Fed’s target. On June 13, the U.S. Bureau of Labor Statistics will release the Consumer Price Index report for May. Headline inflation has decelerated sharply since last summer, but core inflation has remained in a narrower range. The latest nowcasts don’t imply that this will change much.”

The current assessment by the Cleveland Fed’s Nowcast is predicting that inflation will rise 0.19% month over month and core inflation will also rise by 0.45%. If these predictions are correct the annualized rate of inflation would be 4.1% and 5.3% respectively.

Although this would confirm that headline inflation is dropping below core inflation it is clear that components remain persistent, a dilemma for the Federal Reserve. Persistent inflation has also been highly supportive of gold. As of 6 PM EDT, gold futures basis the most active August contract is down $1.60 from the New York close and fixed at $1979.70.

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Wishing you as always good trading,

Gary S. Wagner