Personal Consumption Expenditures inflation data for March is expected to confirm a lack of disinflationary progress for 2024 so far. This recent trend has caused the U.S. Federal Reserve to downplay expectations for interest rate cuts in the coming months.
March PCE inflation will be reported at 8:30am E.T. on April 26. The monthly reading is expected to come in at 0.32%, and 0.30% on a core basis according to nowcast estimates from the Cleveland Federal Reserve. That compares to a monthly 0.4% increase for the Consumer Price Index for March, as reported on April 10. If PCE forecasts hold, it would mean some acceleration of inflation, with the annual PCE inflation rate having falling to a 2.4% annual rate for January 2024, but now perhaps accelerating to 2.6% for March based on nowcast estimates. Roughly, a 0.3% monthly inflation reading, if compounded for 12 months, translates to 3.7% annualized inflation. That well below peak inflation, but still significantly above the FOMC’s 2% goal.
The Fed’s Reaction
The Federal Open Market Committee has recently downplayed expectations for near term interest rate cuts. That’s in part because recent inflation data has given the FOMC little comfort that inflation is trending down currently.
Recent inflation data for 2024 has halted the progress on disinflation seen in late 2023. There is concern that hitting the Fed’s 2% annual inflation goal will take more time. For example on April 18, New York Federal Reserve President John Williams signaled a lack of urgency in looking to cut interest rates, as reported by Reuters.
Inflation could ultimately move lower, especially if housing costs cool. Lower inflation might be expected based on broader home price trends, but so far has not been evident in inflation indices.
As such, for now, the FOMC is taking a wait and see approach to interest rates. A robust jobs market is, so far, enabling the FOMC to be patient in waiting for more progress from inflation data before considering rate cuts.
The FOMC’s May Meeting
No move in interest rates is expected at the Fed’s May meeting, but fixed income markets still estimate one or two interest rate cuts are the most likely scenario before the end of 2024. That’s according to the CME’s FedWatch tool. That implicit forecast is a change from earlier estimates for 2024, which projected a more interest rate cuts starting in early summer.
A run of unsupportive inflation data over recent months has caused FOMC policymakers to signal that interest rate cuts may come later than previously expected and PCE inflation data may prove to be another datapoint supporting that direction.
On current forecasts implied in fixed income markets, the first interest cut could come by July, but more likely September. That later start also implies fewer interest rate cuts in 2024, and has been one factor in recent equity market weakness.
This shift is primarily driven by unsupportive inflation data, but the jobs market plays into it too. As the jobs market has proved more robust than forecast, especially given higher interest rates, so FOMC policymakers have felt less pressure to cut interest rates and thereby head off potential economic weakness.
