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The Fed should take June rate hike off the table

After pricing out the possibility of another rate hike this year, Tuesday's stronger than expected reading on Consumer Prices whipsawed bond traders, forcing them to price back in the possibility of a rate hike as early as next month.

Adding to the ever-shifting mood, Federal Reserve official Dennis Lockhart suggested the markets may see one, two, or even three rate hikes this year, more than the market currently anticipates, further destabilizing the already fragile market's emotional state.

It's is true that readings on inflation have risen of late, with core Consumer Prices, which exclude volatile food and energy costs, touching, or even mildly exceeding the Fed's 2 percent objective.

However, the Fed's preferred measure of overall inflation, the core PCE Deflator, remains a few tenths of a percent below target, suggesting patience may still be a virtue.

The Federal Reserve building
Chip Somodevilla | Getty Images
The Federal Reserve building

With raw materials costs rebounding, from oil to steel to copper, there is likely more inflation pressure in the pipeline.

However, in my opinion, inflation pressures appear "transitory," just as the Fed has suggested that deflationary pressures appeared to be.

Oil, in my view, is not destined to remain near $50 per barrel. The price has nearly doubled from its lows of $26.05 earlier in the year, due largely to supply outages in Libya, Nigeria, Iraq and Canada.

This has caused a temporary deficit in daily production, but the overall glut of oil, around the world, remains near record levels. That is evidenced by rising costs for oil storage, which is in greater demand than oil itself. I expect oil to fall back toward $30 by the end of the year, or maybe even $20, which has been my target for quite some time.

As for the rebound in other raw materials prices, some of that may be the result of casino-like action in the Chinese commodities markets, where aggressive futures trading drove iron ore, steel, and even egg futures, dramatically higher before crashing again.

I may sound like a broken record, but inflation remains a phantom problem. The ghost of economies past, particularly that of the 1970s, continues to haunt the hallowed halls of the Fed. But the wage/price spiral that some Fed officials still fear occurred in an environment that bears no resemblance to today's economy.

Financial deflation and technological disinflation remain the larger factors in a weak global economy.

In addition, despite some mildly stronger than expected data on Tuesday, the U.S. economy appears to be decelerating. And, the rest of the world is hardly operating at full capacity.

The U.S. economy probably could withstand another quarter-point rate hike, as an inoculation against incipient inflation … probably.

But in truth, the process of normalizing interest rate policy remains data dependent and dependent, as well, on a strengthening global economy, for which there is no convincing data at all.

(Japan's economy expanded last quarter, some long-overdue good news, but it's far from breaking out at some sort of earth moving pace.)

I still believe the Fed can afford to wait. The flattening of the yield curve, which is intensifying, is a bond market signal that a rate hike could be imminent. But it's also a signal that suggests tighter policy will slow the economy even further.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.