The odds of a May Fed rate hike remain high

Interest rate futures indicate that the Federal Reserve is likely to raise its policy rate once again in May, according to a report released by the government on Wednesday, even though consumer prices rose by the smallest amount in almost two years in March.

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As the short-term interest rate futures for May rose after the release of the report, they now have a 68% chance of being raised by a quarter of a percentage point, down from a 73% chance before the release of the report. As of right now, the target range is between 4.75% and 5.00%.

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There was a significant fall in inflation from 6% in February to 5% in March, thanks to lower gasoline prices.

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However, the Fed still has a lot of work to do in order to bring inflation down to its 2% target, as housing and other factors related to inflation are pressing forward, suggesting that it needs to tighten its policy further to achieve this goal.

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After two regional lenders failed last month, the Federal Reserve policymakers are concerned about being faced with a competing concern: potentially tighter credit conditions as a result of this failure putting stress on the whole financial sector. Austan Goolsbee, president of the Chicago Fed, called for patience and prudence when it comes to raising rates in light of those risks.

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There have been other Fed policymakers who have indicated that they are comfortable with another interest rate hike, and Chair Jerome Powell has stated that he does not want to risk falling short of the mark on policy tightening, only to have to raise rates again in the event that inflation starts to rise again.

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Traders firmed up their expectations after the CPI report came out that the Fed would reverse course by the end of the summer and deliver a few rate cuts by the end of the year. On the basis of futures prices, they now think that the short-term interest rates will end the year about half a percentage point lower than they are now.

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"Convera's Joe Manibo, a senior economist and economist with Convera Research, believes that the Fed is well positioned to reduce interest rates later this year if we do see a sudden slowdown in the economy, given that inflation has dropped from 6% to 5%.