Major stock indexes closed at a record high Wednesday evening after the annual inflation rate fell slightly to 3.4 percent.
The S&P 500 closed at a record high of 5,300 while the Dow Jones Industrial Average and Nasdaq also closed at highs of 38,908 and 16,742 respectively.
Investors reacted positively to news of a slight slowdown in inflation from 3.5 percent in March, raising hopes that the Federal Reserve will begin cutting interest rates in September.
So-called “core” prices, which exclude volatile food and energy costs, climbed 3.6% in the year to April – the smallest increase since the same month in 2021 .
The figures, released Tuesday morning by the Bureau of Labor Statistics, offer some relief after three consecutive CPI releases suggesting that price pressures continue to strain the U.S. economy.
Investors reacted positively to news of a slight slowdown in inflation from 3.5 percent in March, raising hopes that the Federal Reserve will begin cutting interest rates in September.
Fed Chairman Jerome Powell said during a discussion in Amsterdam yesterday that officials did not expect the reduction in inflation to be smooth.
Inflation must slow so the Fed can cut interest rates, which are currently at a 23-year high of between 5.25 and 5.5 percent.
Higher rates aim to curb consumer spending by reducing demand, thereby leading to lower prices.
The Fed has a clear goal of reducing the annual inflation rate to 2%.
At the start of the year, economists predicted that authorities would cut rates up to four times.
But consistently higher-than-expected inflation figures have cast doubt on the plan.
Prices are being pushed up by rental costs which, in turn, have risen due to soaring housing values. Statisticians don’t use house prices to calculate inflation because a house is partly an investment. Instead, they rely on rents to reflect increasing property values.
Fed Chairman Jerome Powell said yesterday during a discussion in Amsterdam: “We didn’t expect it to be a smooth road.”
He added that officials must “be patient and let restrictive policies do their job.”
Some 96.9% of investors now expect the Fed to keep rates unchanged at its next meeting on June 12, according to the CME FedWatch tool.
But about three-quarters expect rates to be cut by the body’s Sept. 18 meeting, if not sooner.
Hopes were also boosted by a separate report showing that retail spending in April fell 0.4% below economists’ expectations.
Gary Pzegeo, head of fixed income at CIBC Private Wealth US, wrote in a note to clients: “Taken (along with retail sales), this supports a Fed rate cut in the fall.”
“The markets anticipate a decline in September and have decided to consider a second decline by December.”
The Federal Reserve has voted to keep interest rates at their current 23-year high, officials announced today.
Higher rates aim to curb consumer spending by reducing demand, thereby bringing prices under control.
The Fed’s benchmark funds rate has a ripple effect on the interest offered to households on their credit cards, mortgages and personal loans.
The average rate for a 30-year fixed-rate mortgage hovers at 7.09 percent, according to government-backed lender Freddie Mac.
Meanwhile, the average interest on a credit card is 20.66 percent, according to figures from Bankrate.
Credit cards are one of the few borrowing vehicles that offer a variable rate, meaning they move with the Fed funds rate.
The cost of automatic loans has also climbed. The average rate for new auto loans in March was 7.4 percent, according to data from Edmunds.com.