Fed Rate-Cut Bets Grazed Rather Than Maimed by US-Mexico Deal

Darnell Taylor
June 12, 2019

The latest confirmation of the absence of inflation should comfort markets hoping the Federal Reserve will cut interest rates in the coming months to boost the economy, especially amid President Donald Trump's multi-front trade wars.

The Labor Department said Wednesday that the consumer price index rose 1.8% during the past year.

The first real sign of trouble that the U.S. economy may be fast running out steam came from Friday's jobs report that showed a big drop in payrolls in May.

Falling unemployment rates and a pick-up in wages have done little to push prices higher.

"The Fed interest rate way too high, added to ridiculous quantitative tightening", Trump wrote in a tweet on Tuesday. Bond-market investors expect the central bank to lower rates as it tries to brace the economy for slowing global growth, lower corporate spending and a weaker consumer outlook.

"We believe the Fed will cut rates this year but wait until December as they want to see evidence in the hard data that heightened trade tensions are significantly eroding economic activity before pulling the easing trigger", she said in an analysis.

At the same time, inflation is showing signs of firming by another measure that the Fed prefers.

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With the dollar being on the backfoot since the latest eruption in trade tensions, the USA currency is looking slightly oversold and could be prone to an upside correction if the data come in at or above estimates.

"The weakness in inflation is starting to look less transitory", said Leslie Preston, a senior economist at TD Bank. Although the Fed does not monitor CPI inflation as closely as it does the core PCE price index, a fall in the CPI rate would point to cooling inflationary pressures in the economy.

USA inflation was 1.5% in April, according to the Fed's preferred gauge, and has been under its 2% target for most of the last seven years. In the 12 months through May, the CPI increased 1.8%, slowing from April's 1.9% gain.

Gasoline prices fell 0.5 per cent in May after rising 5.7 per cent in April. But the prices for prescription medication fell 0.2%. The index for all other items minus food and energy increased 0.1 percent, the report said.

-Food costs rose 0.3 per cent from the prior month after a decline in the prior period; Expenses for medical care commodities were down 0.4 per cent.

Prices for used motor vehicles and trucks tumbled 1.4%, marking the fourth straight monthly drop.

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