The Fed’s preferred inflation gauge veered in the wrong direction last month for the first time since September, but core inflation fell for the 13th consecutive month to 2.8%.
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An inflation gauge closely watched by Fed policymakers showed annual inflation rising to 2.5% in February, away from the Fed’s 2% target for the first time since September.
However, the personal consumption expenditures (PCE) price index rose 0.3% from the previous month, which was in line with economists’ expectations, a significant improvement from January.
Data released on Friday It also showed annual inflation slowing in February, excluding food and energy price swings.
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The impact of the latest inflation data on mortgage rates will be a matter of speculation until next week, when the bond market for U.S. Treasuries and mortgage-backed securities, which fund the majority of home loans, reopens for trading after being closed on Good Friday.
PCE and Core PCE Trends
Although the PCE price index is the Federal Reserve’s Preferred inflation indicatorIn addition, central bank policymakers are also paying close attention to core PCE, which excludes food and energy costs.
Core PCE, a more reliable indicator of underlying inflation trends, fell for the 13th consecutive month in February to an annual rate of 2.8%.
Upward revisions to December and January data showed that core PCE rose 0.5% from December to January, but the month-on-month growth rate cooled to 0.3% in February.
Mark Zandi, chief economist at Moody’s Analytics, said the latest data from the U.S. Bureau of Economic Analysis “should alleviate concerns” about a month-on-month jump in core inflation in January.
Mark Zandi
in a postal Zandi said on social media platform
Economists at Pantheon Macroeconomics also believe the latest data supports the Fed’s interest rate cut in June.
Ian Shepherdson
“Our base case is that core PCE in the coming months will be more like February than January,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients on Friday. “If our view is is correct and the labor market is as soft as the continued decline in small business hiring plans suggests, then the Fed will ease policy in June.”
But Fed Governor Christopher Waller, speaking Wednesday ahead of Friday’s personal consumption expenditures price index, said he was in no rush to start cutting rates. While the central bank has “made good progress towards achieving its 2023 inflation target”, the data he has seen so far this year “leave me uncertain about the pace of continued progress”.
Waller: ‘There’s no rush yet’ to cut interest rates
Waller – previously described by Reuters as an inflation hawk but now considered centrist — said the “remarkable U.S. economy has been progressing steadily,” making it “a fairly easy decision to wait a while to better understand the trajectory of inflation” before cutting rates.
At the March 20 meeting, Fed policymakers said that while they would not cut interest rates until they were more confident that inflation trends were declining, they still expected three rate cuts this year.and six more meetings According to the plan, the Federal Open Market Committee may not start cutting interest rates until September and still implement three interest rate cuts in 2024.
Among those who support lower mortgage rates, expectations that the Fed could begin significant rate cuts in May have faded, while futures markets are pointing to a diminishing likelihood of a rate cut in June.
Tracked futures market CME Group Fed Watch Tool On Friday, the probability of a rate cut on May 1 was 4%, while the probability of one or more rate cuts before June 12 had fallen to 63.6% from 75.6% on March 22.
“The risk of waiting a while to cut interest rates is significantly lower than the risk of acting prematurely,” Waller said. said wednesday at the Economic Club of New York. “I would like to avoid lowering policy rates prematurely and risking a sustained rebound in inflation.”
Federal Reserve Chairman Jerome Powell said last week that the central bank is also considering whether to slow the pace of shrinking its $7 trillion balance sheet, which could give mortgage rates room to fall.
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