The Fed’s preferred measure of inflation eased more than expected in May, a reassuring sign that the central bank may not have to raise interest rates much more in its battle against flamboyant prices.
The core PCE price index, also known as the core PCE deflator, rose 0.3% month over month in May, down from 0.4% in April and below expectations of 0.4% among economists polled by FactSet.
The headline personal consumption expenditures index, which includes more volatile food and energy prices, rose just 0.1%, down from 0.4% in April and in line with economists’ expectations. Core PCE deflator rose 3.8% yoy, down from 4.4% in April and also in line with expectations, core PCE deflator rose 4.6% yoy, down from 4.7% in April and below expectations at 4.7 growth %.
This release should ease investor nerves about how aggressive the Fed will be this year in tightening financial conditions. After 10 consecutive interest rate increases since March 2022, the central bank hit the pause button in June, but warned that further increases may be necessary to bring inflation under control.
Traders increased their bets on rate hikes in July and September – spurred by strong economic data and recent hawkish comments from Federal Reserve Chairman Jerome Powell – but some of those bets started to fade on Friday. Chances of a July rate hike fell to 87% from 89% a day earlier, according to the CME FedWatch Tool, which tracks Fed funds futures, with the odds of rates staying steady rising to 13% from 11%. Thursday.
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The immediate market reaction was at least positive. Futures tracking
Dow Jones Industrial Average
It advanced 150 points, or 0.5%, to extend gains from before the data release.
Standard & Poor’s 500
Futures rose 0.6%.
“While the immediate reaction in equity markets remains positive, underlying inflation remains flat, pushing 10-year and 2-year yields higher,” said Quincy Crosby, strategist at LBL Financial. “This report supports the July 26 rate hike as warned by Jerome Powell.”
On an annual basis, core personal consumption expenditures at 3.8% are now the lowest since April 2021 – a sign of how low inflation has been since that measure peaked at 7% in June 2022. However, inflation remains above 2% for the Fed. Goal.
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For now, the Fed’s mission is not clear-cut. Although they may not have been done with the rapid rises, they probably didn’t have much work to do, said George Mathieu, chief investment officer at Key Private Bank. “Next week’s June employment report will be the next key data point for evaluation and likely the key indicator in determining the Fed’s next move.”
Write to Jack Denton at [email protected]
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