After last week’s news that the Fed would start stabilizing interest rates, today’s US inflation data confirmed the right course of action.
The US consumer price index falls for the second month in a row to 4.9% year-on-year, meaning a fall in inflation higher than expected. The data was released on Wednesday, after the latest predictions were concluded on Tuesday evening.
On average, banking institutions expected US inflation to fall to 5%, therefore the result was better than forecasted.
Core inflation, which is an index measuring consumer prices without energy and food, remains higher than general inflation at 5.5% year-on-year. Core inflation is usually taken into higher consideration by central banks when deciding their monetary policies.
Indeed the American housing market shows further signs of inflationary trends, worrying investors of a bubble ready to explode. Nevertheless, to avoid a severe recession coming this year, the American Federal Reserve announced a likely interruption in interest rate hikes.
The Fed raised interest rates for a likely last time earlier in May. Currently, US interest rates are at 5-5.25%, unfortunately still lower than the core inflation level.
But further rate hikes will almost certainly result in recession, with the American economy giving worrying signs of slowing down. US GDP for the first quarter revealed a gloomy landscape, with a mere 1.1% growth year-on-year.
How will markets react
The US inflation data was released as American stock exchanges open on Wednesday morning. Because general consumer prices were revealed to be better than expected, markets will likely experience growth today and likely for the rest of the week.
According to predictions, markets will close on Wednesday with a 1-1.25% growth.
The news should also remove some pressure from the bank’s shoulder, being a further reason for the Fed to stop raising interest rates.
Indeed, the Fed will likely keep rates stable until inflation slowly reaches the 2% target level, which optimistic forecasts predict for September. Then, the Fed will finally start bringing rates down.
This means that banks need to resist until the end of the year, an unlikely but not impossible scenario. On the other hand, however, inflation has been coming down for months now, and the banking crisis has only gotten worse.
Following last week’s collapse of First Republic, marking the second largest bank failure in US history, many other institutions have shown worrying symptoms. In fairness, none of them was as big or relevant as First Republic, and JP Morgan CEO Jamie Dimon predicted it would be the last “big bank failure”.
But banks and markets remain in dire straits, hoping that good inflationary news will give them a much needed breath of fresh air.
