Soft inflation data for May may have bought the Fed at least a month, but not so much that it has to figure out what to do next. With the consumer price index for all items up 4% from a year ago, policymakers can take a month to assess the impact of the previous 10 rate hikes. After Tuesday morning’s CPI release, markets are pricing in a 95% chance the central bank will not raise rates at its two-day meeting that ends Wednesday, according to CME Group. However, the market still sees a 63% chance that the pause will not last long, with officials continuing to raise rates at their July 25-26 meeting. Gregory Daco writes: “The latest consumer price inflation data doesn’t change the outlook for the Fed to skip a June rate hike, but it illustrates the ‘should I stay or should I go’ dilemma facing the Fed as it contemplates further hikes , chief economist at EY-Parthenon. “Some Fed policymakers,” he added, “will interpret persistent (and backward-looking) core inflation pressures and signs of ‘continued’ tightening, while others with more forward-looking policy frameworks will see ‘A case to stay.'” Indeed, while the report showed inflation at a more than two-year low, it was a mixed bag when it came to looking ahead. Compared with this year, excluding the impact of soaring energy prices last year, the core CPI still rose by 0.4% in the current month, up 5.3% year-on-year. That figure is a far cry from the Fed’s 2 percent inflation target, and is why officials continued to tighten monetary policy in July unless data now and later confirm further progress. “Markets are too sure about a pause in rate hikes at this point, and the Fed doesn’t want to surprise investors,” said SEI Chief Investment Officer Jim Smigiel. Another rate hike, and possibly one more after that (not yet priced in).” Markets have been pricing in rate cuts for this year for months, but that has changed recently. The theory behind the rate cut is that the economy could slip into a recession this year, forcing the Fed to capitulate. However, several officials have stressed that inflation is too high and they do not expect to ease policy until at least 2023. After this week’s meeting, policymakers will release a “dot plot” of interest rate forecasts for the next few years, along with their collective outlook on inflation, gross domestic product and unemployment. The dot plot does not foresee a rate cut this year, but the next few years could indicate less uncertainty and growing divisions among members. Krishna Guha, head of global policy and central bank strategy at Evercore ISI, expects a more hawkish and divided Fed. “The Fed will not raise rates in June; the decision will be positioned to skip to a July meeting and slow to a rate hike every other meeting, rather than extending the pause,” Guha said in a statement. stated in the client report. “If the data tone stays the same but there’s no hard lock in July, the Fed will signal a default again in July; about a third, a third, a third of the SEP don’t think a default will happen Many hikes, one hike and two hikes (six or seven of 18 are hawks.)” Fed Chairman Jerome Powell may have a tough task ahead in his post-meeting news conference, Explain the position of his fellow policymakers. Risk markets have been riding a surging wave of tech giants for solid gains this year, though such interest-rate-sensitive sectors could drag markets down again. A pullback in inflation is thus both an opportunity and a challenge for central banks caught off guard by the sharp price spikes. Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote: “Such a rapid headline deflation will make it harder for the Fed to justify another rate hike, but we cannot rule out a July hike just yet. Likelihood.” “It all depends on the data, but we expect the June jobs report and core CPI to both be down 0.2%, so our base case remains that the Fed is done. But it will be close.”