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Weak inflation stokes speculation the Fed may cut interest rates

Adapted from the U.S. Department of Commerce; Chart: Axios Visuals

The Fed's preferred measure of inflation sank in the first quarter, coming in at 1.3% compared to 1.8% in the prior quarter, the Commerce Department said on Friday.

Why it matters: Inflation continues to drift further below the Fed's 2% target, despite strong economic growth and a booming labor market — strengthening the case to hold off on raising interest rates and potentially cut rates.

  • As of Friday afternoon, traders' bets that the Fed would cut rates by year-end jumped 1.3% higher from where they were yesterday. In the meantime, the odds of two rate cuts rose to 20% from 15%.

The backdrop: The Trump administration, including President Trump himself, has called on the Fed to cut interest rates and sought to fill vacant seats at the Fed with candidates who support this case.

  • The White House's top economic adviser Larry Kudlow said again on Friday that the Fed should cut rates, telling CNBC: "The inflation rate continues to slip lower and lower."
  • Fed officials have also hinted at the possibility of a rate cut, as Bloomberg points out. Earlier this month, Chicago Fed president Charles Evans told reporters that if "inflation were to move down to, let's just say, 1.5%" that would mean interest rates at the current level were "holding back inflation, and so that would naturally call for a lower funds rate."

What's next: The Fed will hold a two-day policy meeting next week. No rate change is expected, but brace for plenty of questions about whether or not the Fed is concerned about the inflation slowdown.

Go deeper: The absence of inflation is forcing a wide-ranging rethink of long-held economic assumptions