Federal Reserve Inflation Rate Keeps June Rate Cut In Play; Powell Is OK With Dissent

The primary Federal Reserve inflation rate, the core PCE price index, came in only hot as chair Jerome Powell signaled it would. That should keep a June rate cut on the table, though the S&P 500 and government bond market reaction will be delayed with financial markets closed on Good Friday.

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Fed Chair Powell

Chair Powell is participating in a panel discussion at the San Francisco Fed that began at 11:30 a.m. ET. Powell said the Fed isn’t in a rush to cut and will need to see a resumption of lower inflation readings before it gains the confidence to cut rates. Still, Powell said he doesn’t want to wait too long to cut, allowing for an unneeded degree of economic weakness.

“The economy’s strong. The labor market’s in a good place,” Powell said. He’s aiming for a policy-setting “that keeps the strength but allows for further progress on inflation.”

Powell was asked about divisions in the Fed, following new quarterly projections that showed 10 policymakers anticipate three quarter-point rate cuts this year, while nine committee members see two cuts or fewer.

That’s an important question, given that five voting members of the Fed’s policy-setting committee are on record supporting two or fewer cuts. Powell’s answer: “It’s not a problem when people dissent” from Fed decisions, though he’ll seek broad consensus.

Primary Fed Inflation Rate

The personal consumption expenditures, or PCE, price index rose 0.3% in February, below 0.4% forecasts. The 12-month headline inflation rate picked up to 2.5%, as expected.

Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. The core PCE price index rose 0.3% in February, matching forecasts. The core 12-month inflation rate came in at 2.8%, as expected, after January’s core inflation rate was revised up from 2.8% to 2.9%.

The data looked better if not rounded to tenths of a percentage point. The core PCE price index rose 0.26% in February. January’s increase was revised up slightly to 0.45% from 0.42%. The changes put the 12-month inflation rate at 2.78%, the lowest since March 2021.

Fed chair Powell’s prediction at at his March 20 news conference proved on the mark. He said that the Fed expected the monthly increase in the core PCE price index to be “well below 30 basis points,” keeping the 12-month inflation rate at 2.8%.

Powell said last week that the hot January reading may have reflected seasonal effects, with price increases to start the year not fully offset by seasonal adjustment.

Still, the core PCE inflation rate rose to 2.9% on a six-month annualized basis, up from 2.6% in January and 1.9% in December.

Personal Income, Spending

The PCE price index is released with the Commerce Department’s monthly personal income and outlays report. Personal income rose 0.3%, trailing 0.4% forecasts. Personal consumption expenditures rose 0.8% in February vs. 0.5% forecasts. That followed a weak 0.2% rise in January.

Federal Reserve Rate Cut Odds

Ahead of the February PCE report, market pricing showed 64% odds that the first rate cut will come by the June 12 meeting.

Markets are now pricing in a year-end 2024 Fed funds rate of 4.62% vs. the current range of 5.25% to 5.5%. That builds in 70% odds of three quarter-point rate cuts.

S&P 500

The S&P 500 tacked on 0.1% in Thursday stock market action, inching to a new record closing high. That closed out the first quarter with a 10.2% gain, the biggest since the second quarter of 2020.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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