TD Securities economists have analyzed the April Consumer Price Index (CPI) report, noting that its strength was primarily driven by increases in shelter and energy prices [1]. Despite firm inflation in services excluding housing, they expect the core Personal Consumption Expenditures (PCE) Price Index to run softer than CPI, with the supercore PCE anticipated to ease ahead of upcoming Producer Price Index (PPI) data [1]. The economists observe that tariff pass-through effects are fading, which may contribute to a moderation in inflation pressures [1].
With labor-market conditions showing improvement, TD Securities predicts that the Federal Reserve (Fed) will transition from a dovish bias to a more neutral policy posture, while maintaining its current stance and remaining on hold [1]. They highlight that although Fed pricing moved modestly higher following the CPI report, this single data point is unlikely to prompt a change in the Fed's approach, especially as the labor market stabilizes and the impact of energy prices remains uncertain [1].
The report suggests that services ex-housing inflation could cause some Fed officials to pause, but overall, the path of least resistance is for the Fed to adopt a neutral stance amid stabilizing economic conditions [1].
CONCLUSION
TD Securities expects the Federal Reserve to move toward a neutral policy stance as inflation stabilizes and labor-market conditions improve. The April CPI report led to a modest increase in Fed pricing, but is not seen as sufficient to alter the Fed's current position of remaining on hold. Market participants should watch for further data, particularly the upcoming PPI release, for additional signals.