PCE Preview: Will Fed’s Hawkish Stance Continue?

Inflation is widely expected to record a slowdown in price growth in the United States, which could pave the way for the Federal Reserve to seriously consider cutting interest rates later this year.

Meanwhile, US consumer income and spending readings may record signals that the US economy is not moving at a steady pace in terms of growth. At the same time, there are other expectations prevailing across financial markets that the first interest rate cut by the FOMC could be next November, which would, accordingly, alleviate the pressures resulting from the high interest rate environment at all levels.

Investors and market participants are awaiting a slew of readings of personal consumption expenditures, personal income, and consumer spending in the United States. Personal consumption expenditure indicators come at the forefront of this data in terms of importance because they are considered the most reliable for the Federal Open Market Committee’s members, which is mandated to set and change monetary policy decisions as well as decisions to change or stabilize interest rates.

On Thursday, preliminary indicators of personal consumption expenditures were released, highlighting a limited decline in the quarterly readings on the level of personal expenditures. The personal consumption expenditures price index reading in the United States rose by 3.3% in the first quarter of this year, compared to the previous reading, which recorded a slightly larger rise of 3.4%.

The personal consumption expenditures index excluding food and energy prices in the United States recorded an increase of 3.6% in the first quarter of 2024, compared to the previous reading, which recorded an increase to slightly higher levels of 3.7%.

These readings were also negatively affected by growth readings in the first quarter of this year, which highlighted the rise in US GDP at a slower pace than before. The annual reading of GDP in the United States recorded an increase of 1.3% in the first quarter of this year, which is lower if compared to the previous reading; 1.6%.

Food, Energy Prices

Inflation excluding food and energy prices is expected to rise by about 0.2%, highlighting a decline from the 0.3% reading recorded last March. Readings that exclude these categories of prices – the most volatile among the components of consumer prices – are of great importance for the Fed, which focuses on this type of indicator, seeking greater accuracy. Monetary policy officials also believe that these are indicators that shed light on broader inflation trends, so they rely on Core PCE when examining monetary policy conditions and when making decisions about future moves.

Fed officials are waiting for more price stability in the country to appear and for inflation to continue to fall sustainably since last July, when the Fed kept interest rates unchanged, at the same current levels – which represent the highest levels in approximately 23 years – in order to seek any signas that prices are beginning to slow or that inflation is heading steadily towards the central bank’s target of 2.00%.

Inflation readings recorded levels worse than market expectations earlier this year, this has, accordingly, diminished investors’ hopes for a rate cut this summer, so most market expectations shifted to the possibility of starting to reduce interest rates in late 2024.

The recently released data on inflation prompted a number of members of the Board of Governors of the Federal Reserve Bank to pour cold water on expectations of interest cuts, which had previously accelerated to a large extent in the previous months. It is worth noting in this context the statements by a member of the Board of Governors of the Federal Reserve Bank, which was published Recently, indicating that “it is wise for the Fed to wait several months before cutting interest rates in order to ensure that inflation declines and actually returns to the path leading to the central bank’s target of 2.00%”.

Monetary policymakers argue that in the absence of clear labour market weakness, they need to see good inflation data for several months before they feel comfortable supporting accommodative, easing monetary policy action.

Fed members desperately want to avoid falling off the cliff, and that is what is important. They see nothing at all now that suggests that waiting three or four months could cause the economy to slide into the abyss.

It appears from these and other statements by other Fed members that there is a general tendency to begin reducing the federal interest rate next September, but only if good inflation data emerges that highlights the continued decline of inflation at a sustainable pace.

These statements also increased investors’ confidence that the Fed is about to cut rates this year, which raised speculation among investors in global financial markets that the Fed’s first rate cut may take place next September, while the Fed’s last meeting this year may witness the second cut.