GOLD Federal Reserve Interpretation of May CPI Data
Key CPI Figures (May 2025)
Headline CPI:
MoM: 0.1% (vs. 0.2% forecast, prior 0.2%).
YoY: 2.4% (vs. 2.5% forecast, prior 2.3%).
Core CPI (ex-food/energy):
MoM: 0.1% (vs. 0.3% forecast, prior 0.2%).
YoY: 2.8% (vs. 2.9% forecast).
Fed’s Likely Interpretation
Cooling Inflation Momentum:
The softer-than-expected MoM and core CPI prints suggest inflation is moderating, particularly in goods categories like gasoline (-2.6% MoM) and autos. Shelter inflation (3.9% YoY) also cooled slightly, a critical factor for the Fed.
Annual CPI (2.4%) remains above the Fed’s 2% target but shows progress from pandemic-era peaks.
Tariff Impact Delayed:
The data reflects limited immediate pass-through from Trump’s April tariffs, which are expected to raise prices by ~1.5% over time. The Fed will remain cautious, as tariff effects could materialize in late 2025, complicating the inflation trajectory.
Labor Market Resilience:
Despite softer inflation, unemployment held at 4.2% in May, and wage growth stayed elevated (3.9% YoY). This gives the Fed flexibility to prioritize inflation containment over premature easing.
Policy Implications:
Near-Term Hold: The Fed is almost certain to keep rates at 4.25–4.50% in June, aligning with its "higher for longer" stance.
Dovish Tilt for 2025: Markets now price a ~75% chance of a September cut (up from ~55% pre-CPI). The Fed may signal openness to easing if inflation continues trending toward 2% and tariff impacts remain muted.
Market Reactions
Bonds: 10-year Treasury yields to 4.12%, reflecting bets on future rate cuts.
Dollar: The DXY dipped to 98.50 but stabilized as traders weighed Fed caution against global risks.
Equities: Nasdaq and S&P 500 rallied on reduced stagflation fears.
What’s Next?
June 12 PCE Data: The Fed’s preferred inflation gauge will confirm whether disinflation is broadening.
Federal Reserve Interpretation of June 12 Economic Data
Key Data Points
PPI (Producer Price Index) MoM: 0.1% (vs. 0.2% forecast, prior -0.5%).
Core PPI (ex-food/energy) MoM: 0.1% (vs. 0.3% forecast, prior -0.4%).
Unemployment Claims: 248K (vs. 242K forecast, prior 247K).
Fed’s Likely Interpretation
1. Subdued Producer Inflation
Cooling Input Costs: Both headline and core PPI rose 0.1% MoM, below expectations, signaling muted producer-side inflation. This follows prior declines (-0.5% headline, -0.4% core), suggesting persistent disinflationary pressures in supply chains.
Implication: Weak PPI supports the Fed’s view that inflation is moderating, reducing urgency for rate hikes. However, the Fed will remain cautious about potential tariff-driven price spikes later in 2025.
2. Labor Market Softening
Rising Jobless Claims: Claims increased for the second straight week (248K vs. 242K forecast), aligning with May’s softer ADP and NFP reports. The 4-week average now sits at 243K, the highest since September 2023.
Implication: A cooling labor market supports arguments for rate cuts to avoid over-tightening, but the Fed will seek confirmation in future reports (e.g., June NFP).
3. Policy Outlook
September Rate Cut Odds: Markets now price a ~70% chance of a September cut (up from ~65% pre-data). The Fed is likely to hold rates steady in July but may signal openness to easing if disinflation broadens.
Balancing Risks: While PPI and claims data lean dovish, the Fed remains wary of premature easing given:
Sticky Services Inflation: CPI services ex-energy rose 4.1% YoY in May.
Tariff Uncertainty: Trump’s tariffs could add 1.5% to inflation by late 2025.
Market Reactions
Bonds: 10-year Treasury yields fell 3 bps to 4.09%, reflecting rate-cut bets.
DXY: Dollar index dipped to 98.30, pressured by dovish Fed expectations.
Conclusion
The Fed will view today’s data as reinforcing the case for rate cuts in 2025, but policymakers will likely wait Q2 GDP before committing. While PPI and jobless claims suggest easing inflation and labor momentum, the Fed’s cautious stance on tariffs and services inflation means a September cut remains the baseline scenario, contingent on sustained disinflation.
July Meeting: Likely a hold, but the Fed’s updated dot plot could hint at 2025 cuts.
Tariff Watch: Delayed price pressures from tariffs remain a wildcard, keeping the Fed data-dependent.
Summary
The Fed will view May’s CPI as encouraging but insufficient to justify imminent rate cuts. While inflation moderation supports a dovish pivot later in 2025, policymakers will demand more evidence of sustained disinflation and clarity on tariff impacts before easing.
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