Friday's Market Minute: The Fed Funds Rate Is Near Neutrality

Markets rallied yesterday after falling mid-week as producer price inflation readings showed softness in wholesale prices which fell 0.5% in March, well below the consensus of a flat reading. This is good news for disinflation trends and bullish market momentum to remain in place at least in the short term. 

However, the latest consumer price inflation data is one of the most important economic releases ahead of the Fed’s next policy meeting. Even though headline inflation is coming down, the uptick in sticky core CPI will maintain pressure on Fed to push ahead with another rate hike in May. Estimates based on Fed Funds futures currently point to a near 70% probability of this being the case, despite the belief that a credit crunch in the wake of several recent U.S. bank failures could negate the need for another increase. Since the official inflation rate and the federal funds rate interact in a general equilibrium, 5.6% annualized core inflation suggests the Fed has more work to, at the very least, achieve neutrality in rates relative to the general level of prices in the economy.

The Fed is slowly but surely winning the fight against inflation, and the case to pause is strengthening even as an additional rate hike appears to be priced in at this time. As more clarity on rates and inflation plays out over the balance of the year, the focus of investors in the next several weeks will be on corporate earnings and forward guidance.

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