Incoming data make the Fed’s job more difficult

The latest decline in the core CPI inflation rate to 1.9% in April, at the same time as the unemployment rate dropped to a decade low of 4.4%, presents a dilemma for the Fed. The price stability part of its dual mandate suggests that it would be prudent to put further rate hikes on hold for a while, whereas the full employment part implies that the Fed should instead accelerate the pace of its monetary tightening. Our take is that the Fed will probably push ahead with additional rate hikes this year, with the next increase coming at the upcoming FOMC meeting in June. The survey evidence suggests that the unemployment rate could fall further, possibly even below 4%. At the same time, the decline in core inflation is partly due to a one-off fall in the cost of cell phone service plans.