Considerations on the Federal Reserve 2018 Rates Hike Path

After some time of Inflation below the Federal Reserve 2% Target, last Monday we came very close; the Core Personal Consumption Expenditure Price Index (Core PCE) has been reported at 1.9%. The Core PCE is the Fed's preferred inflation measure.

The chart below provide by the Bureau of Economic Analysis updated only until March 2018 show the evolution of the Core PCE since the year 2012.

This fairly strong reading may force the Federal Reserve to increase Interest Rates 4 times this year vs their latest expectation of 3 hikes shown in the Dot Plot of March.

The chart below provided by Bloomberg show the evolution (YTD) of the probability of 3 rate hikes (white Line) and 4 rate hikes (Blue Line)

Policy Makers forecast a Core PCE at 1.9% until year end and then a 2.1% for next year. If Inflation will hover around 2-2.2% the Fed should continue with  predictable and mellow rate hike increases. If, on the other hand the Core PCE will increase above 2.3% during the next months, then the Federal Reserve may be forced to increase the speed of rate hike. This may derail this economic expansion. We have to monitor the Core PCE closely during the next months to better understand if the pick up in inflation is temporary or persistent.

In the meantime the 2Y Interest Rate reached 2.5%. I think that a 3% rate for the 2Y Note may start being a drag on the Consumer.