If there’s one inflation indicator the Fed tracks more than any other – it’s Core PCE (personal consumption expenditures). The PCE price index looks at U.S. inflation by measuring changes in the cost of living for households. It tracks the prices of a basket of goods and services, each with different weightings, to reflect how much a typical household spends every month. Today we learned that Core PCE continues to soften – which is good news. Question is does this give the Fed further scope to cut rates sooner rather than later?
Inflation
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Market Confident on Imminent Rate Cuts Despite Inflation Print
Today we received the final monthly inflation report for 2023 – ahead of the Fed’s next policy meeting Jan 30-31. Markets were expecting very good news… but did they get it? On the surface, both prints were slightly higher than expected. However, we saw a mostly muted reaction in both bond and equity markets. Bond yields fell – with the market maintaining its 68% expectation of a rate cut as early as March.
Two Reasons the Fed Could Cut Rates
The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.