Goldman Sachs has lowered its terminal fed target range to 5.0% -5.25% from 5.25% to 5.5%. They see a May 25 basis point hike but no longer see a June hike of the same magnitude.
They site the expectations for shelter costs to start to come down lowering the need for the Fed to continue hiking.
With the headline CPI at 5.0% now, it is still well above the 2% target. However, the next 3 months will drop out gains of 0.3%, 1.0%, and 1.3% in successive months. That totals 2.6% coming out of the YoY equation.
If shelter costs – which account for 34.7% of the total CPI – do flatten, and goods inflation continues to behave due to expectations for slower growth, who knows how low inflation does go. If we see MoM numbers toward unchanged, 2% will be in traders sites. FYI, Service ex shelter was 0.0% this month. Core services ex shelter rose 0.4% this month:
Fed Barkin – during a CNBC interview – said that if the Fed target is 2% they (i.e. the Fed) should see the rate move to that level at least for a few months before claiming victory. The Fed – from the dot plot – sees rates remaining steady into year end (with a range of 5.0% to 5.25%). Meanwhile, the Fed Funds contract for December is at 95.55 or 4.45%. The market is more hopeful for cuts.
Having said that, the way the year ago numbers are lining up, getting to 2% is still a hard hurdle unless we start to see negative MoM numbers. However, the trend lower is improving and slower growth ahead has traders hopeful for a shift in the Fed before the end of the year.