Treasury yields fell as inflation eased, strengthening the case for the Federal Reserve to slow its rate hike pace in order to avoid a more severe economic downturn. Stocks rose slightly.
Wall Street looked past its initial disappointment with a barely in-line consumer price index to focus on the possibility of an inflation peak in the rearview mirror. The swap market reflects this perception, with less than 50 basis points of tightening priced in for the next two Fed meetings — with a small chance of no move at all in March.
Of course, none of this implies that the Fed will soon declare victory over inflation. No resilient consumer demand, particularly for services, and a tight labour market remains a significant threat to prices. However, the data show that things appear to be moving in the right direction, paving the way for the Fed to switch to a quarter-point hike at its next meeting.
