Economists at Wolfe Research provided their insights on the Fed's outlook following comments made by Fed Chair Jerome Powell.
Powell maintained his pessimistic stance yesterday, which is in line with his comments the previous month. He pointed to the ongoing rebalancing in the labor market, described the current interest rate as restrictive, and suggested that services inflation excluding housing should remain above 2% even as overall inflation trends return towards the 2% target.
Powell expressed his belief that inflation will continue to decline, albeit at a slower pace than desired.
Following his comments yesterday, the market's focus now turns to the April Consumer Price Index (CPI) report, scheduled for release later today.
After three consecutive months of higher-than-expected inflation data, consensus on the April CPI has narrowed, suggesting that even a slight deviation from expectations could lead to significant short-term volatility in stock prices.
“While this morning's CPI report could spark some big near-term moves, we don't expect a turn to the downside until it becomes clear that (1) the U.S. is headed toward a recession, or (2) the Fed will raise interest rates to tame… Inflation,” Wolf. Economists said.
“Neither of which is part of our basic condition!”