Inflation report boosts odds of September rate hike

Financial markets' reaction Friday to the unexpected uptick in April Consumer Price Index data underscores the wild and crazy world of quantitative easing, according to Bob Rice, managing partner at Tangent Capital. “This shows us the fascinating Catch-22 of the QE world,” he said, referring to the Federal Reserve's now-finished bond-buying program. “A tiny nudge up in CPI strengthens the dollar because it improves the chance the Fed will tighten, and that hurts earnings and exports, and more importantly threatens to create huge volatility if central bank policy diverges.” The April CPI report showed the core inflation, excluding food and energy prices, rose 0.3%, which was above the 0.2% consensus estimate. It also impressed the markets because there were some analysts who actually feared a deflationary figure. BOOSTS ODDS FOR SEPTEMBER HIKE Chris Gaffney, president of EverBank World Markets, said the market likes the data because it improves the odds that the Fed will raise rates in September, now that a June hike is already off the table. “We saw the markets immediately react with rates going higher and Treasurys falling off a bit, because the data indicates inflation is still moving higher,” he said. “That's what everybody was waiting for, and it's certainly what the Fed is waiting for.” Mr. Gaffney added that even though wages are still down over the past six years, the improving employment picture is a positive sign that the economy continues to improve. “I believe we're going to see inflation continue to increase throughout the year,” he said. “But this Fed is still pretty dovish, and without wage inflation, they might still be hesitant to raise rates in September.” Mr. Gaffney added that he was expecting a June rate hike, and that he still believes the markets need to experience that first quarter-point rate hike to get rates off zero. “I believe there are members of the Fed who want to get off zero,” he said. “They will add a quarter point, then let the markets react, then wait and see what happens.” Paul Schatz, president of Heritage Capital, is less enthusiastic about the meager bump in CPI data. “I have been in the deflation camp since 2007, and I keep hearing these Chicken Little inflationists talk about the collapsing dollar and hyperinflation with the Fed printing close to $5 trillion,” he said. “Inflation has been complete and utter nonsense.”