Inflation cooled in April and May after increasing in the first quarter. The consumer price index reading was unchanged in May on a month-over-month basis after increasing 0.3% in April, the softest reading since July 2022.

However, year over year, CPI rose 3.3%, which was slightly below the consensus estimate of a rise of 3.4%. Signs of cooling inflation have lifted the morale of investors but the Federal Reserve remains concerned as it is still sharply higher than its 2% target.

The Federal Reserve has so far struggled to control sky-high inflation even after adopting an aggressive monetary tightening campaign wherein it increased interest rates by 525 basis points since March 2022.

The Federal Reserve hasn’t hiked interest rates over the past 11 months, which has brought some respite to the consumers. However, it has been delaying its planned rate cuts as it believes inflation needs to decline further at a sharper pace.

Federal Reserve Chairman Jerome Powell said in his post-FOMC statement in early June that the central bank sees just one rate cut in 2024, sharply lower than the three rate cuts it had projected in its March meeting.

Investors were optimistic at the beginning of the year and were pricing in at least five rate cuts in 2024 after inflation declined sharply last year. However, the optimism started fading in February as inflation resumed its climb.

Hopes of three rate cuts started fading in April as the Fed said that it would cut rates only when officials are confident that inflation is declining sharply.

A single 25 basis point rate cut in 2024 means consumers will have to bear the burden of higher borrowing costs for a longer period.

During periods of high interest rates, institutions within the banking sector — including retail banks, commercial banks, investment banks, insurance companies, and brokerages — tend to experience increased profitability. This is due to higher lending rates, which result in greater earnings for these institutions and create wider spreads between the federal overnight fund rate and the rates they charge their customers.

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