The news that core prices rose by a more modest 0.3% in March, even as higher energy prices drove headline inflation to a 40-year high of 8.5%, explains why investors pared bets this week on how far interest rates would rise. We still expect the Fed to deliver a series of 50bp rate hikes at its next three policy meetings. But weak GDP growth and a drop in core inflation to nearer 4% should persuade the Fed to revert to 25bp hikes from September onwards.
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