It wasn’t a triple witching hour, with three sets of bad news hitting the same day. However, between a better-than-expected inflation read on one hand and indications the Federal Reserve backed off from two to one possible rate cuts on the other, call it a double vertigo day.
First, the better news. The Consumer Price Index came in lower than the expectations collected by Dow Jones. Inflation was flat over April, slightly lower than the projected 0.1% increase. Year over year, the CPI was 3.3% instead of the expected 3.4%. Core CPI was 0.2% month over month, not 0.3% as projected. Even better, core CPI, without food or energy, was 3.4% year-over-year as economists expected 3.5%.
Plus, “the largest category of services inflation, shelter costs continued to rise at a buoyant 0.4% m/m and 5.4% y/y as residential rental cost maintain a strong pace of increase (up 0.4% on the month),” Nationwide Chief Economist Kathy Bostjancic wrote in an emailed note this morning. “We still expect rental inflation to ease going forward, but it has remained higher than real-time new rental data have suggested for much of the past year.”
However, that leaves commercial real estate the apparent perpetrator of inflationary pressures, even though that is a result of rapidly rising operational costs — taxes, utilities, and maintenance costs, as reported by GlobeSt.com — and ongoing higher interest rates that push owners to maintain high rents for a path to profits.
“The further moderation in the CPI readings in May (flat headline and up just 0.2% at the core) will be welcomed by Fed officials and keeps alive the prospect of the Fed starting to cut rates in September,” Bostjancic wrote a more hopeful view from early today. “It could encourage some Fed officials to pencil in two rate cuts for this year, who otherwise might have been leaning towards less cuts. FOMC members can adjust their interest rate and macro forecasts ahead of the release of their updated forecasts at 2pm today.”
Apparently not, though. The Federal Open Market Committee’s statement, after the vote to keep rates as they’ve been, was hawkish as some observers thought. “The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year,” the Fed wrote. “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”
Furthermore, the median Fed projection of the benchmark federal funds rate is up from the March estimate, showing only one expected rate cut for 2024. At a likely 25 basis points, multiple sources have told GlobeSt.com that the amount of trim would be too small to encourage more transactions. And if any more negative news surfaces in the second half of the year, it would still be possible to lose one cut.