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Market Update

Inflation making its way down, markets remain opposed to Fed on future of rates

May 15, 2023
  • amol dhargalkar headshot


    Amol Dhargalkar

    Managing Partner, Chairman
    Global Head of Corporates

    Kennett Square, PA


Inflation reached two-year lows in April, encouraging markets to maintain their stance that rate cuts are coming soon. Meanwhile, Fed officials have kept their options open on the path forward for rates for the rest of the year.

Inflation cooling in the U.S.

Consumer price index (CPI) data was released last Wednesday in the U.S., coming in at 4.9% year over year (the slowest pace since April 2021). The decline was bolstered by lowering prices for fuel oil and new vehicles, though increases in shelter, gasoline, and used vehicles mostly balanced out those changes. Core CPI rose 0.4% month-over-month, which is consistent with the annual pace and was in line with market expectations. It does mark a slight increase from March, where the month-over-month increase was 0.3%.

Despite coming in under market expectations, there was a lackluster reaction to the April CPI news. The 2y and 10y treasuries fluctuated slightly over the course of the week, but ended at 3.91% and 3.42%, respectively, marking no net change from the prior week.

PPI slows, coming in below expectations

The headline producer price index (PPI), which measures the average change over time in selling prices received by producers, increased by only 2.3% in April after a 2.7% increase in March. This marks the lowest PPI increase since January 2021, indicating that prices for both producers and consumers are starting to ease. The month-over-month PPI increase for April came in at 0.2%, which was impacted most by a 0.3% increase in prices for final demand services.

Fed officials stay firm despite market view on rate cuts

While the language used at the May FOMC meeting was less indicative of future rate hikes, Fed officials clarified that does not mean additional hikes are out of the question. New York Federal Reserve President John Williams said last Tuesday that he “[does] not see in [his] baseline forecast any reason to cut rates this year,” adding that “we haven’t said we are done raising rates.”

During remarks at the European Central Bank in Germany on Friday, Federal Reserve Governor Michelle Bowman stated that recent economic data is still showing elevated inflation and a tight labor market, which could require “additional monetary policy tightening.” She also noted that the policy rate “will need to remain sufficiently restrictive for some time” in order to get inflation closer to the FOMC’s 2% target.

Despite fairly consistent messaging from the Fed that there is more work to be done, last week’s economic data releases seemed to affirm the market’s view that rates will go down soon. As of Friday, rate cuts are being priced in for as early as July, with some seeing rates falling below 4% within a year from now.

Fed funds target rate expectations as of 11:00 a.m. EST on May 12, 2023

Fed officials have committed to evaluating the present state of economic data in June prior to the next FOMC meeting, so time will tell in terms of the ultimate path forward for rates.

Looking ahead

This week’s economic data releases include U.S. retail sales and housing starts for April on Tuesday and Wednesday, respectively. With the path forward for rates still uncertain, corporates have a variety of risk management tools available to them to help mitigate exposure to interest rate movement.

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About the author

  • Amol Dhargalkar

    Managing Partner, Chairman
    Global Head of Corporates

    Kennett Square, PA

    Amol Dhargalkar is a Managing Partner and Chairman for Chatham’s Board of Directors. He is the Global Head of the Corporates sector and brings over 20 years of experience in derivatives capital markets expertise.


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit