Despite recent declines, inflation remains well above the Fed’s 2% objective, and the market expects the central bank to boost interest rates by 25 basis points.
Consumer inflation in the United States declined in March, according to numbers released on April 12th. The Bureau of Labor Statistics reported that annual inflation slowed to 5.0% in March from 6.0% in February, marking the lowest 12-month increase since May 2021.
The report showed a 0.1% increase in March over the prior month on a seasonally adjusted basis, much lower than the 0.4% reading in February and below analyst expectations as well.
The decline in consumer inflation can be attributed to a large decline in energy prices, which was partially offset by rising costs for housing. Gasoline prices, in particular, fell by 1.4% in March, contributing to the decline in energy prices. Meanwhile, prices for shelter, which is the largest component of the consumer price index, continued to rise. Shelter prices increased by 0.3% in March, which was the same increase as in February.
The Fed’s next move
Although inflation has been showing signs of cooling, it is still above the Federal Reserve’s target rate of 2%. With the next Federal Open Market Committee (FOMC) meeting less than 20 days away, the market is wondering what to expect from the Fed. The FOMC will meet on May 2nd and May 3rd to discuss monetary policy and potentially make changes to interest rates.
At the time of writing, the market is currently predicting a 31.8% chance that the Fed holds and pauses rates, while 68.2% of the market thinks that the Fed will raise rates by 25 basis points.
The Fed has been closely monitoring inflation as it decides on monetary policy. If inflation continues to cool, it may give the Fed more leeway to hold off on raising interest rates or to raise them at a slower pace. However, if inflation begins to heat up again, the Fed may feel pressure to raise rates more quickly to prevent the economy from overheating.
In addition to inflation, the Fed is also keeping an eye on other economic indicators, such as employment and economic growth. The unemployment rate has been steadily increasing, and the economy has been declining, which could also factor into the Fed’s decision on interest rates.
Bitcoin
Following the announcement, the value of Bitcoin rose by more than 1.5%, peaking at $30,430, but eventually retreated to its support level of $30,000. It is evident that the price increase occurred due to traders capitalizing on short-term profits. Bitcoin appears ready to stabilize at this point, and a strong narrative will be necessary to sustain its upward momentum.
Final Thoughts
While March’s drop in consumer inflation is encouraging, the rate is still above than the Fed’s 2% target. The market expects the Fed to raise interest rates by 25 basis points at the next FOMC meeting. However, the Fed’s decision will also depend on a wide range of factors, including inflation, employment, and economic growth.