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US inflation fell to 3.3% in May, raising expectations of an early interest rate cut and providing a boost to the stock market and President Joe Biden.
The data was released a few hours ago Federal Reserve Officials are expected to outline a plan to cut interest rates this year, slightly below economists’ expectations.
US stocks opened at record highs and Treasury yields fell after the release as investors bet on more interest rate cuts this year.
The S&P 500 rose as much as 1.1% to a record intraday high of 5,434.88 shortly after the open, while the Nasdaq Composite rose 1.5%.
Futures market traders have been betting on a rate cut in September, ahead of this year’s presidential election, taking odds to 84%. This compares with 60% before the inflation data was released.
Investors are now fully appreciating two quarter-point interest rate cuts this year. Previously it was between one and two.
The headline consumer price index rose 3.3% compared to a Reuters survey that expected the rate to remain at 3.4%.
Core CPI, which strips out changes in food and energy prices, came in at 3.4%, below expectations for a slight decline to 3.5%.
Bureau of Labor Statistics data on Wednesday also showed monthly inflation was zero, while the core number rose just 0.2%.
Biden hailed the numbers as “welcome progress in reducing inflation,” adding that inflation is now “nearly two-thirds of its peak,” with core inflation at low levels most since April 2021.
The US President is looking to convince voters of his economic performance before the November election.
However, he still trailed Republican rival Donald Trump in his ability to handle the economy last week. FT-Michigan Ross Poll of American voters, although he has narrowed the gap in recent months.
Two-year Treasury yields, which fluctuate with interest rate expectations and inversely with prices, fell to their lowest since early April, down 0.16 percentage points to 4.68%. .
The Fed is expected to leave interest rates unchanged at a 23-year high of 5.25 to 5.5%, in an announcement to be made later on Wednesday.
The central bank will also publish its forecast, or “dot plot,” of how many times it plans to cut borrowing costs this year.
Blerina Uruci, chief US economist at T Rowe Price, said her “baseline scenario” is that the Fed will signal a two-quarter rate cut this year.
In March, in further signs of persistent price pressures in the US economy, the central bank said it expected three cuts by 2024.
“My base case is that they go from three to two,” Uruci said, arguing that a drop in the core inflation rate would be “quite encouraging” for the Fed. “The risk that they drop to one, after this CPI report, is lower.”
While the Fed’s preferred measure of inflation is the personal consumption expenditure figure, CPI data still has an impact on the central bank’s approach to cutting interest rates.
