There was welcome news as both the Consumer and Producer Price Indexes showed cooler than expected inflation in May. This followed tame consumer inflation readings in April and was another positive step in the right direction after the progress lower late last year stalled at the beginning of this year.
The Fed has faced intense pressure to curb the runaway inflation that became rampant over the last few years, hiking its benchmark Fed Funds Rate (the overnight borrowing rate for banks) eleven times since March 2022. These hikes were designed to slow the economy by making borrowing more expensive and lowering the demand for goods, so pricing pressure and inflation would shrink.
Inflation has cooled considerably after peaking in 2022, with the three major inflation measures (Consumer Price Index, Producer Price Index and Personal Consumption Expenditures) showing significant year-over-year declines in both their Headline and Core readings. Core removes food and energy prices, which are often volatile.
![](https://cdn.prod.website-files.com/64555ce9fe44f34940b2c512/666c88c1f538953b764847dd_YoYInflationProgress.png)
While inflation has made significant progress lower, it is still above the Fed’s 2% target as measured by Core PCE. Fed Chair Jerome Powell has repeatedly said that the Fed does not expect to cut rates until members have “gained greater confidence that inflation is moving sustainably toward 2 percent.” The Fed reiterated this sentiment in their Monetary Policy Statement released after their June 11-12 meeting.
In addition, the Fed’s "dot plot" of member forecasts signaled that just one rate cut is expected before the end of the year, down from three cuts forecasted in March, though these estimates can change quickly based on upcoming data. The Fed did acknowledge that they have seen “modest further progress” toward their 2% goal. This was a change from their statement in May that noted the “lack of further progress” at the start of this year.
The unemployment rate is another factor we’ll have to monitor, given the Fed’s dual mandate of price stability and maximum employment. The latest Jobs Report from the Bureau of Labor Statistics showed that the unemployment rate finally rose to 4% in May after staying in a tight range between 3.7% and 3.9% since last August.
According to the Summary of Economic Projections that were also released after the Fed’s June meeting, sixteen of nineteen Fed members would be surprised by a 4.2% unemployment rate, so this will be a key level to watch. If the unemployment rate does rise this high, the Fed could decide to be more aggressive or move up the timing of rate cuts.
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By Shelly Williams @ MBS Highway
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