15/05/2017 - Inflation Clouds US Interest Rate Expectations

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Downside risks to inflation continue to cloud the outlook for interest rates despite a healthy U.S. economy, Federal Reserve Bank of Chicago President Charles Evans said “inflation pressures are still under-running our 2 percent objective in the U.S At the moment, I think the downside risks still predominate”. He stated that he was comfortable with two rate hikes this year. Evans believes it  may be more appropriate to raise rates just once more if the outlook deteriorates.

The U.S. core CPI increased 1.9 percent year-on-year in April, the smallest gain since October 2015, after rising 2.0 percent in March. The Commerce department said retail sales rose only 0.4  percent last month below economists’ expectations of a 0.6% rise. While March saw an upwardly revised 0.1 percent gain.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 0.3 percent annualized rate in the first quarter, the weakest pace since the fourth quarter of 2009. Consumer spending is being supported by a tightening labour market with the unemployment rate at a 10-year low of 4.4 percent. Motor vehicle sales increased 0.7 percent in April after declining 0.5 percent in March.

Sales at building material stores rebounded 1.2 percent last month after slumping 1.7 percent in March. Receipts at electronics and appliance stores increased 1.3 percent, adding to March's 2.2 percent jump.

Federal funds futures imply that there is  a 49 percent chance the Fed would increase rates twice by the end of 2017, compared with 54 percent shortly before the release of the latest readings on U.S.

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