U.S. inflationary pressures likely to rise, Fed unlikely to hike rates in April

Underlying inflationary pressures are likely beginning to rise, based on certain signs. However, majority of the FOMC members are expected to undertake a watchful stance about the pace of tightening policy due to the uncertainty regarding future price developments, noted Lloyds Bank. There seems to be restricted upward pressure on wage growth. This implies that labor market still has certain slack. The US Fed’s preferred inflation measure, core PCE deflator, continued to be at 1.7% y/y in February, whereas the core CPI measure decelerated in March to 2.2% y/y from February’s 2.3% y/y.

Financial markets expect the US Fed to hike rates by just one quarter point in 2016, as compared with the recent Fed median ‘dot plot’ that indicates the central bank policymakers projecting two interest rate rises. Given the uncertainties regarding sustainability of the recent inflation acceleration and signs of weaker growth in Q1, the central bank policymakers are not expected to hike rates during its meeting in April, noted Lloyds Bank.

However, the US economic growth continues to be solid to allow a more rapid pace of tightening policy than anticipated at present by the markets. Growth in employment continues to be solid that will ultimately result in higher growth level of wages, while the economic growth is expected to recover in Q2, said Lloyds Bank.