A Hawkish Fed?

The stock market should continue to be impacted by the Iran war and corporate earnings this week.  It also will likely focus on the release of the April 28-29 FOMC Minutes on Wednesday for signs of a more hawkish Fed.  While the Minutes should show some movement in sentiment away from policy easing prospects, they will affirm that steady policy is currently the appropriate stance.  Although a steady policy should be neutral for stocks, the shift in sentiment could exacerbate the market consolidation that began on Friday.  (This exacerbation could be short-lived since Nvidia reports earnings after the close on Wednesday.)  Rate hikes at future FOMC meetings could be the factor that eventually derails the stock market rally.  The latest inflation-related data don't call for one as yet -- steady Fed policy is appropriate.

Fed Chair Powell gave insights into the policy debate at the April FOMC Meeting during his post-meeting news conference.  He made four points about monetary policy:  /1/ The current steady policy is in a good place -- able to move in either direction if needed, /2/ The Fed funds rate is now at the high side of neutral or slightly restrictive, /3/ There is too much uncertainty to say what the next policy move will be, and /4/ While there was a shift among FOMC members to move toward a more neutral stance in the FOMC Statement, they decided it was not appropriate to do so at this meeting.  

The Minutes may not be much different from those of the prior meeting (March 17-18 FOMC Meeting). The latter showed concern about high inflation, but more in terms of a potential future threat.   At this earlier meeting, officials said that a long Iran war could result in "more persistent increases in energy prices and these higher input costs would be more likely to pass through to core inflation."  Officials concluded that "progress toward the Committee's 2 percent objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee's objective has increased."  Many officials said this situation "could call for rate increases to help bring inflation down to the Committee's 2 percent objective and keep longer-term inflation expectations firmly anchored."  However, most participants held to the position that they should wait and monitor developments before deciding on the "appropriate stance of monetary policy."  The important word to looks for in the April Minutes is whether "Many" becomes "Most" in a sentence calling for rate increases at some point.

Regarding inflation, last week's data gave a somewhat distorted picture, but underscored that the pass-through of higher oil and other commodity prices will likely lift prices of other goods and services.  The distortion was in the April CPI, while the pass-through effect was pronounced in the April PPI.

The high prints for the April CPI (+0.6% m/m Total and +0.4% Core) reflected a technical adjustment to Primary and Owners' Equivalent.  Their calculation involves comparing the sample's rents with what they were six months earlier.  In April 2026, the 6-month comparison was with October 2025.  The latter, however, was not measured because of the government shutdown.  BLS had plugged in the level of April 2025 for October 2025.  This substitution was lower than it would have been had it been measured, so the 6-month change in April 2026 was lifted as a result.   It is a one-off adjustment, so Primary Rent and OER should revert to the 0.2-0.3% m/m trend in May.  If this trend had been used in April 2026, Total would have been 0.5-0.6% and Core would have been 0.2-0.3% (2.4-3.7% annualized).  So, the high prints overstated inflation, and a more accurate measure shows core inflation only somewhat above the Fed's 2% target.

There are still risks that inflation will pick up as higher energy and commodity prices are passed through and other special factors spark price hikes.  The April PPI shows these channels.  The April PPI prints were high (Total +1.4% m/m Total and +0.6% Core Less Trade Services).  However, there were only a few Core components with large increases.   Some clearly resulted from a pass-through of higher oil prices.  Freight transportation -- rail, air and truck -- surged.  Other special factors may have been responsible for large increases in other areas --Electronic Components, Household Furniture, and Internal Combustion Engines.  All these price increases presumably will show up in consumer prices in coming months.

The prospect for higher prices ahead should keep the Fed on hold.  However, in principle the Fed should not react by tightening policy if oil or other special factors are responsible.  The higher prices are better viewed as relative price changes than a ratcheting up of inflation.  At some point these prices and their pass-through will stop.  The Fed should be more concerned if the higher prices spur a speedup in wage increases.  This could result in a wage-price spiral -- true inflation.  So far, wages remain in check.  So, prospects for a wage-price spiral are not an actionable risk at this point and the Fed can afford to wait.