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Why Odds of 4th Rate Hike Fell after February Inflation Report

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February inflation is in line with expectations

The US Bureau of Labor Statistics reported that US consumer prices increased marginally in February. The labor department reported on Tuesday that the consumer price index (or CPI) increased by 0.2% in February after posting gains of 0.5% in January. The year-over-year increase in core inflation (TIP) was reported at 1.8%, unchanged from the January reading. The inflation (VTIP) reading for February was largely in line with expectations, which is easing investor fears about interest rates rising too quickly and impacting the growth rate of equity investments and depressing the value of bonds (BND).

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Reasons behind slow inflation growth

Declines in gasoline prices and the cost of rental properties were cited as reasons for lower inflation growth in February. This lower inflation growth in February has allayed the fears that were ignited after a stronger-than-expected 0.5% inflation increase in January. A higher inflation (SCHP) growth rate could push the US Fed towards faster rate hikes than expected.

Overheating inflation fears aside for now

Though the inflation increase in February was in line with expectations, the odds for a fourth rate hike in December 2018 fell after the report was published. The Chicago Mercantile Exchange’s Fed Watch Tool, which tracks the Fed futures and lists target rate probabilities, reported a change in odds for a December rate hike from 28% to 25%. The CPI report was the key data piece before the FOMC meeting next week. Markets are expecting a rate hike of 0.25% at the March meeting, but the key market mover at the meeting will be the FOMC members’ view about future rate hikes. In the remaining parts of this series, we’ll analyze how bonds, equities, and the US dollar (UUP) reacted to the February inflation report.

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