With inflation knocking on the Fed doors, two more rate hikes are still in play after June

This article originally appeared on FXStreet.

• The US headline inflation rose 0.2 percent over the month in May while rising 2.8 percent over the year.
• The US core inflation rose 0.2 percent over the month in May while rising 2.2 percent over the year.
• With the US inflation approaching 3 percent level, the Federal Reserve is likely to continue its gradual path of monetary policy normalization with two more hikes this year after it hikes tomorrow.

The inflation is back in the US, with the headline Consumer Price Index (CPI) rising 2.8 percent over the year in May, approaching 3 percent level. With the inflation gauge being stripped of food and energy prices, the core inflation measure rose 2.2 percent over the year in May, meeting the Federal Reserve’s implicit inflation target that justifies its move on interest rates as early as tomorrow.

The past inflation is rising, but the question is how sustainable and how persistent the inflation in the US is as transport, tobacco, and housing items were the main upside contributors to the US inflation in May. With the wage growth creeping higher, it is widely expected that the US core inflation will be rising further peaking somewhere around 2.5 percent in the second half of this year.

Looking at the projected growth in the US around 3.5 percent in the second quarter this year, and the US labor market strength, it is a sure shot that Federal Reserve will hike rates tomorrow. And this is also what is widely priced-in the US Dollar on the foreign exchange market.

With inflation at 21.8 percent and core inflation above the target, it would be a huge surprise from Fed not to raise rates tomorrow.

With the Federal Reserve Bank hiking rates, as expected, the market focus shifts to the tone of the Fed’s statement. This should be overly positive as the US economy is gathering the economic momentum. Should the economic projections from the Fed’s policymakers materialize, the Fed’s 
“dot plot” should reflect it and with growing expectations of two more rate hikes in the second half of this year.