Does PCE data make Fed’s job easier or harder?

The Fed’s favourite inflation gauge; Core Personal Consumption Expenditures Price Index has fallen below 3% for the first time since March 2021, indicating that US inflation is cooling.

The three-month and six-month charts of the core PCE show they are below the Fed’s target of 2%. This suggests the Fed may be considering a pivot, as the recent trend shows the economy is below 2%. Josh Schafer, a Yahoo Finance Reporter, discusses the data and its implications for monetary policy.

The Fed is expected to pivot due to concerns about tightening monetary policy and damaging economic data. The Fed’s upcoming comments by Chair Jerome Powell may increase caution about being too restrictive. The conversation may also include three cuts in the S&P, possibly due to a positive economy and decreasing inflation. The goal is to avoid damaging “soft landing” data with positive economic data and inflation.

The Fed is shifting its focus from cutting US interest rates to a more gradual approach. The Fed’s personal consumption expenditures price index increased 2.6% in December, and the central bank’s underlying inflation is now running below its 2% goal.

This shift in communication may be evident in the policy statement due to be issued next Wednesday after the end of the first Federal Open Market Committee (FOMC) meeting of 2024.

Fed officials have adjusted their steering by shifting from “pain” to a “golden path,” avoiding a “mistake,” and even allowing for the possibility of rate hikes. Some Fed officials have also noted that the risk of hanging on too long for rate cuts is becoming less significant.

Fed policymakers are aiming for price stability, balancing the risk of overdoing it and underdoing it. They are treading cautiously, with rate cuts likely to follow a different cadence from the aggressive “front-loading” of rate hikes in 2022, and are treading carefully and not rushing.

In conclusion, the Fed is shifting its focus from a hawkish approach to a more gradual approach to addressing inflation and balancing risks.