The April Personal Consumption Expenditure (PCE) report released today, confirming that inflation eased slightly in April. Investors are already speculating over a potential September interest rate cut with price growth finally easing.
Indeed, inflation increased 0.3% on the month, reflecting annual inflation of 2.7%, in-line with forecasts on both counts. The “core” PCE, which excludes the volatile Food and Energy categories, increased at 2.8% year-over-year (YOY) in April, 0.1% higher than projections.
The core PCE remains one of the Federal Reserve’s most-cited inflation measures. As such, its relative stubbornness the past few months may do little to help the growing rate-cut hopes. In fact, core inflation is only down about 0.1% since December, far slower than Fed officials had hoped.
“The core index came in at 2.8%. That’s fine, but it’s been trading in a range for five months now, and that’s pretty sticky to me,” said Dan North, Senior Economist for North America at Allianz Trade. “If I’m [Fed Chair Jerome] Powell, I’d like to see that start moving down, and it’s barely creeping. … I’m not reaching for the Pepto yet, but I’m not feeling great. This is not what you want to see.”
April PCE Report Keeps Rate Cut Hopes Afloat
Investors have been eagerly awaiting the April PCE since the release of the corresponding Consumer Price Index (CPI) and Producer Price Index (PPI) inflation reports, printed earlier in May. Both indices showed a slight moderation in price growth across both consumer and producer prices.
The headline CPI rose 0.3% in April, snapping a three-month streak of 0.4% monthly inflation. This fueled rumors of a September rate cut, even amid speculation that the Fed may not opt to cut rates until 2025, under the assumption that inflation makes little progress through the end of the year.
With the Fed-preferred PCE adding more fuel to the disinflationary fire, investors will continue to cross their fingers for a near-term rate cut before year end.
The CME Fed Watch Tool currently estimates a less than 1% chance of a rate reduction at the June policy meeting and a 14.3% chance of a cut in July. That said, the tool places a more than 50% chance of a rate cut in September, higher than in previous months.
That said, some analysts believe inflation will have to ease further, or that unemployment will have to aggressively rise, for the Fed to pull the trigger on rate cuts this year.
“Our view is that the Fed might not cut interest rates in 2024. One of two conditions that we would want to see to change this view. 12-month core PCE comes down to 2.4% or lower in the second half of 2024, or the unemployment rate ticks up over 4.2%,” noted Larry Tentarelli, Chief Technical Strategist at Blue Chip Daily Trend Report.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
