$DIA, $SPY, $QQQ, $RUTX, $VXX
FLASH: US inflation is falling again, and this time Fed officials may feel compelled to respond.
After a gauge of price pressures central bankers watch closely finally rose above their 2% target last Summer marking the 1st time North of it since 2012 it moderated to 1.8% in January, and some forecasters see it heading lower still throughout 1-H of this year. That may be reflected in 2 US Commerce Department reports set to be published in the coming days.
Receding inflation could bolster the case for reducing interest rates in Y 2019, even though worries from earlier in the year about an economic downturn have largely passed.
Fed officials have already begun discussing the possibility in public ahead of their 30 April – 1 May policy meeting.
That being the case, investors are piling into bets that the benchmark federal funds rate will come down later in the year, even as they push US stocks to record highs.
Chicago Fed President Charles Evans laid out the case on 15 April, while speaking with reporters after a speech in New York.
“I think the answer has to be yes,” Mr. Evans said, when asked if low inflation could be grounds for a cut. “If core inflation were to move down to, let’s just say, 1.5%,” that would indicate the current level of rates “is actually restrictive in holding back inflation, and so that would naturally call for a lower funds rate, at least so that it was accommodative.”
His response highlights the way most policy makers think about how their interest-rate moves affect the economy. They believe people consider inflation when making decisions about borrowing and lending, so it is important to focus on inflation-adjusted interest rates.
That means even if the central bankers leave the fed funds rate unchanged, which they have since raising it to just below 2.5% in December declining inflation effectively constitutes a tightening because it pushes up the so-called real rate, which in turn ought to slow the economy and possibly even put more downward pressure on inflation.
After their March meeting, Fed officials projected it would be appropriate to forgo additional rate hikes this year, which would help keep inflation at 2%. But some analysts think that inflation forecast is too optimistic, which means real rates may continue rising.
In a 17 April report, JPMorgan analysts argued core inflation could fall to 1.5% as soon as next month.
If JPM’s prediction proves correct, the downward drift will come with an official review of the current strategy for hitting the 2% target which was announced late last year.
That makes a case for Fed stimulus…
Wednesday, the major US stock market indexes finished at: DJIA -59.34 at 26597.05, NAS Comp -18.81 at 8102.00, S&P 500 -6.43 at 2927.25
Volume: Trade on the NYSE came in at 805-M/shares exchanged
- NAS Comp +22.1% YTD
- Russell 2000 +17.8% YTD
- S&P 500 +16.8% YTD
- DJIA +14.0% YTD
HeffX-LTN’s overall technical outlook for the major US stock market indexes is Bullish to Very Bullish in here.