The Federal Reserve’s favored measure of inflation, the Personal Consumption Expenditures price index, is set to be released with expectations of a 2.6% rise for the 12 months ending in March. The core PCE index, which excludes volatile categories like energy and food, is expected to see a 2.7% increase from the previous year. This report is highly anticipated as it follows a softer-than-expected first-quarter GDP report, which showed a 1.6% annualized growth rate, the weakest since 2022. Despite this, inflation remains high, with the quarterly headline and core PCE indexes showing increases of 3.4% and 3.7% respectively.
The combination of a slowing economy and high inflation has raised concerns of stagflation, where weak economic growth is coupled with high inflation. The Fed has stated that it will not cut interest rates until inflation is closer to its 2% target, regardless of economic slowdown. Some officials have even suggested that another rate hike may be needed if inflation does not decrease, putting further pressure on the economy. Traders are currently projecting one rate cut in the second half of 2024, a decrease from earlier expectations of up to six rate cuts beginning in March.
Despite the weaker GDP report, Treasury Secretary Janet Yellen remains optimistic about the US economy, stating that it is performing well and not overheated. Yellen highlighted the strength of the labor market, calling it the strongest in 50 years, and downplayed concerns about the GDP growth rate. She emphasized underlying indicators of strong growth in the economy. Pending home sales unexpectedly rose in March, despite higher mortgage rates. Contract signings increased by 3.4%, surpassing expectations, and indicating positive momentum in the housing market. However, NAR’s chief economist noted that sustained growth will require declining mortgage rates and increasing inventory.
The housing market saw positive momentum at the beginning of the year, with increasing home sales, improved homebuilder sentiment, and expectations of interest rate cuts. However, the narrative has shifted as mortgage rates have risen to a five-month high. Despite the unexpected jump in pending home sales in March, overall activity has remained relatively stable over the past year without significant growth. To achieve meaningful gains in the housing market, there will need to be a combination of lower mortgage rates and increased inventory. Overall, the economy continues to show signs of stability, despite concerns about inflation and slow economic growth.
