Inflation data intensifies expectations for Fed pause

Wall Street seems to think Wednesday's inflation data clears the way for the Fed to finally hit the brakes on the longest, sharpest series of rate hikes since the early 1980s.

Why it matters: What the Fed does with interest rates is arguably the alpha and omega for financial markets and the economy.

• Why were stocks down 19.4% last year? The Fed. Why did the bond market have one of the worst years on record? The Fed. Why did the housing market hit an air pocket? The Fed. You get the idea.

Driving the news: April's consumer price index data arrived about as economists had expected and provided some underlying reasons for optimism.

• The headline index was up 4.9% compared to last April. The core index — stripping out food and energy prices in order to see an underlying trend — was up 5.5%.

Yes, but: That still seems high!

• It's true that before COVID hit, both figures would have been considered unspeakably elevated. But they're down markedly from last year's highs, of 9.1% and 6.6%, respectively.

The market reaction: Bond prices jumped after the report hit, pushing yields lower. Stocks weaved between slightly positive and slightly negative.

Between the lines: For our money, the most interesting market move came in Fed funds futures, where traders speculate and hedge what the Fed will do with short-term rates.

• The market-based probability that the Fed keeps rates where they are — the Fed funds target between 5.00% and 5.25% — jumped from around 78% on Tuesday, to 95% after the inflation data arrived.

The bottom line: Though there are a few more data drops before the next rate decision on June 14, traders now think it's a near certainty that the Fed will leave rates alone.