Disappointing news on inflation could persuade the Fed to raise interest rates again, giving ammunition to hawks who argue that there is still work to be done to restore price stability. The Consumer Expenditure Price Index, the Fed’s preferred inflation indicator, rose faster than expected in April. Excluding food and energy, the so-called PCE base index rose 0.4% from the previous month and 4.7% from April 2022.

Following the release of these data, Cleveland Fed President Loretta Mester said the Fed had to act and that all options were on the table for the June FOMC. 
Monetary authorities have raised rates 500 bp over the past 14 months to curb inflation exceeding their 2% target.

However, several factors argue in favor of a pause. Medium-sized banks continue to suffer from the rise in rates, probably contributing to the upward trend in financing rates. Despite a more “dovish” speech from the FED, SOFR has risen to 5.32% since the last FOMC. 
A second element is uncertainty about the fate of the debt ceiling negotiations in Congress.

At this stage, the FOMC is divided between those who want a pause, including Jerome Powell, and the hawks, who focus more on the inflationary risk. The Fed may be tempted to give time. Raphael Bostic of the Atlanta Fed and Patrick Harker of Philadelphia have noted that the impact of bank failures on credit has yet to be felt and that monetary policy works with a lag, so much of the pain of higher rates are still to be seen in the official data.

It is not the opinion of investors. They have increased their bets on a rate hike next month to more than 50%, up from 18% a week ago, reflecting recent bellicose speeches by some Fed members and signs of economic strength.

Regarding all these factors, we should see a pause in the monetary policy in the coming months. Unexpected events, such as a recession in the US or new banking accidents, could push the FED to decrease interest rates. In the short term, we should see a stabilization of rates and, at best, a slight decrease. However, in the long run, inflation may remain elevated, and interest rates as well.