PPI Falling and Disinflation Accelerating, the Fed Faces Growing Pressure to Ease Policy

 

Is the Fed About to Pivot? Disinflation and Deteriorating Sentiment Raise Odds of Rate Cuts

Over the past two days, markets have been flooded with key U.S. macroeconomic data that may set the tone for monetary policy in the coming months. A softer-than-expected Consumer Price Index (CPI) on Thursday was followed by a surprising drop in Producer Price Index (PPI) data and a sharp fall in consumer sentiment on Friday. The cumulative effect? Rising bets that the Federal Reserve might shift to a more dovish stance sooner than previously anticipated. The financial markets have responded accordingly—with yields dropping, the dollar selling off, equities climbing, and gold making notable gains.

Disinflation Gaining Momentum

The first major catalyst this week was the March CPI release on Thursday, which showed inflation easing more than expected across the board.

• Core CPI rose by just 0.1% month-over-month, down from 0.2% the previous month and lower than the 0.3% forecast.

• Year-over-year, core inflation also moderated to 2.8%, below both the prior reading of 3.1% and consensus expectations of 3.0%.

• The headline inflation rate was even more striking, posting a negative monthly print of -0.1%, compared to 0.2% previously.

• On an annual basis, headline inflation slowed to 2.4%, from 2.8% in February, and below the consensus estimate of 2.6%.

This broad-based cooling of inflation not only underscores that price pressures are decelerating but also supports the notion that the Fed’s restrictive policy stance over the past year is having its intended effect. A negative monthly CPI print, even if temporary, is a rare event that suggests deflationary impulses may be re-emerging in certain sectors.

Producer Prices Confirm the Trend

If Thursday’s CPI wasn’t enough to stir speculation of a Fed pivot, Friday’s PPI data all but confirmed that inflation is cooling at multiple levels of the economy.

• The Producer Price Index for March came in at -0.4% month-over-month, a steep drop from February’s 0.1% increase and well below the consensus estimate of +0.2%.

This kind of downside surprise in PPI—which measures input prices at the producer level—is significant. Not only does it feed directly into forward-looking inflation expectations, but it also shows that companies are facing declining costs, which often trickle down to consumer prices. This adds further disinflationary pressure, potentially giving the Fed more room to ease.

Consumer Confidence Deteriorates

While falling inflation would typically be a welcome development for households, the University of Michigan’s preliminary Consumer Sentiment Index for April paints a more complex picture.

• Sentiment dropped sharply to 50.8, well below both the previous reading of 57.0 and the expected level of 54.5.

This is one of the lowest levels of consumer confidence since the post-pandemic period, and it indicates that Americans are feeling increasingly pessimistic about the economy, despite inflation softening. The reasons could be multifaceted—lingering concerns about job security, high interest rates, or general uncertainty about the future. Regardless, such a steep decline in sentiment could pressure the Fed to act preemptively, especially if this trend continues into May and June.

Market Reaction: Dovish Shift in Full Swing

Following Friday’s data releases, financial markets responded strongly, signaling that investors are now pricing in a higher probability of rate cuts as early as Q3 2025.

Equity Markets:

• The Dow Jones Industrial Average rose by 0.44%.

• The S&P 500 climbed by 0.49%.

• The tech-heavy Nasdaq led the rally with a 0.56% gain.

The stock market's reaction was textbook: falling inflation and lower rate expectations are bullish for equities, especially growth stocks. The Nasdaq’s outperformance reflects that shift, as lower yields boost the valuation of future earnings.

Bond Market:

• The 10-year Treasury yield dropped by 10.8 basis points to 4.533%.

• The 2-year Treasury yield fell by 5.4 basis points to 3.916%.

This steep drop in yields, particularly at the long end of the curve, reflects a flight to safety and rising confidence that the Fed may need to lower rates sooner. It’s also notable that the yield curve remains inverted, which has traditionally been a recession signal.

Currency Market:

• The U.S. Dollar Index (DXY) fell by 1.26%.

• The EUR/USD surged by 1.55%.

A weaker dollar is a natural response when markets begin pricing in lower interest rates in the U.S. compared to other major economies. The euro's strength underscores how quickly sentiment can turn when macro data diverges from expectations.

Commodities:

• Gold (XAU/USD) jumped 1.75% to over $3,231 per ounce.

• Oil prices fell slightly by 0.18% to $60.09.

Gold’s sharp move higher reflects both falling real yields and the market’s growing uncertainty around the Fed’s next steps. It’s a classic safe-haven trade, reinforced by weakening sentiment data. The small dip in oil prices may reflect demand-side concerns tied to slowing consumer activity.

Policy Implications: Is the Fed Cornered?

With inflation data weakening across both consumer and producer levels, and sentiment falling sharply, the Fed finds itself in a difficult position. Chair Jerome Powell has reiterated that the Fed will remain data-dependent, and the recent releases might nudge the central bank toward easing faster than previously anticipated.

Before these data prints, the market was pricing in one or two rate cuts by the end of 2025. Now, the possibility of a summer rate cut is gaining traction. If disinflation persists and consumer confidence continues to erode, the Fed may find itself having to choose between ensuring price stability and supporting growth—a balancing act that could see monetary policy tilt dovishly.

What complicates matters further is the Fed’s dual mandate. While inflation appears to be under control, labor market conditions remain a wildcard. Should job growth slow meaningfully or unemployment tick up in the next NFP release, it would add even more pressure on the Fed to pivot.

Conclusion: A Turning Point for Monetary Policy?

The past two days of data may very well represent a turning point. Inflation is clearly softening, both at the retail and wholesale level. At the same time, consumers are growing more pessimistic, which could have downstream effects on spending, investment, and hiring.

The Fed has long emphasized patience, but the latest macro data suggests that waiting too long could risk tightening financial conditions too much, pushing the economy into stagnation or worse. Markets have made their call—yields are down, the dollar is down, and risk assets are up. Now, all eyes are on the Federal Reserve.

If the current trend in disinflation continues and sentiment fails to recover, the Fed may be left with no choice but to ease policy sooner than planned. Whether that begins with a signal in upcoming FOMC statements or materializes as a surprise rate cut, one thing is clear: the pivot narrative just got a major boost.

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