Inflation Hits its Lowest Level Since 2021, Fed Holds Rates Steady

Inflation and FOMC day provide a volatile rates session. Swap rates plummeted after consumer price index (CPI) data for May was lower than expected across all measures. Rates fell nearly 20bps in the morning but closed ~10bps lower after a gradual rise during the FOMC decision and following Powell presser. The 2y Treasury yield closed at 4.75% while 5-10 year yields are near 4.30%. The dollar fell alongside rates, with the U.S. Dollar Index now just over 104 after a 0.53% decline. Meanwhile, equities generally rallied, with the SPX and NASDAQ up 0.85% and 1.53%, respectively.

Fed signals one cut in 2024. The FOMC unanimously voted to hold the Fed Funds rate steady today at 5.25% – 5.50%. Despite today’s soft CPI, Chair Powell said that today’s figures weren’t enough to warrant rate cuts right now, and maintained that Fed officials still need greater confidence in declining inflation. The Fed also released their updated dot plot and economic outlook. Fed officials only expect one rate cut in 2024 compared to three cuts forecasted in March, and project four cuts in 2025 vs. three cuts in their previous forecast. Officials raised their core PCE outlook for 2024 from 2.6% to 2.8% and kept their real GDP growth and unemployment rate forecasts steady at 2.1% and 4.0%, respectively. Separately, Chair Powell said that the labor market has “come into better balance” and is more in-line with conditions “on the eve of the pandemic,” but officials expect continued labor market strength. A side-by-side comparison of the June and May FOMC meetings can be read here.

Core CPI records a multiyear low. Core consumer price growth was +3.4% year-over-year (YoY), its lowest since April 2021. All other measures of CPI slowed from April and were lower than expected, with core monthly (MoM) growth at +0.2% and headline growth at 0.0% MoM and +3.3% YoY. May’s data marked the first CPI print to be lower than expected this year, whereas previous 2024 prints were a significant catalyst for rate cut timeline delays.