New York, NY, InfraCap Market Update - The Fed statement acknowledged that “there has been a lack of further progress towards the Committee’s 2% inflation objective”, which we have already heard from the Fed Chair. This mildly hawkish addition to the statement was not a surprise and was offset by the Fed reducing the cap on the roll-off of the balance sheet from $60 billion to $25 billion. In the press conference, Chair Powell stated that a rate hike was unlikely as the next policy move, which was perceived as dovish and caused stock and bond prices to rally.
We continue to believe that inflation in the first quarter was elevated by an increase in energy prices and ongoing measurement issues with shelter inflation. Energy prices have since dropped almost 10% from the highs, which should cause both headline and core inflation to moderate in the 2nd quarter, as there is an approximate 5% bleed-through of energy prices to the core. In addition, the shelter component of inflation will eventually start to reflect the market reduction in actual rents. In addition, we expect that the highly likely ECB June rate cut will cause the dollar to appreciate significantly, which is deflationary as a higher dollar tends to cause commodity prices to moderate and cause economic growth to slow. We forecast that PCE core will decline to approximately 2.5% by the end of June, which will allow the Fed to cut at the late July meeting.
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