The Personal Consumption Expenditures (PCE) inflation data for March is expected to confirm a lack of disinflationary progress for 2024 so far, leading the U.S. Federal Reserve to downplay expectations for interest rate cuts in the coming months. The monthly reading is expected to come in at 0.32%, and 0.30% on a core basis, potentially showing some acceleration of inflation compared to previous months. This may push the annual PCE inflation rate to around 2.6%, above the Fed’s 2% goal.
The Federal Open Market Committee (FOMC) has recently downplayed expectations for near-term interest rate cuts due to the lack of significant progress on disinflation seen in late 2023. Recent inflation data has not provided the FOMC with enough comfort to believe that inflation is trending down, raising concerns that achieving the 2% annual inflation goal may take more time. New York Federal Reserve President John Williams has signaled a lack of urgency in looking to cut interest rates, indicating a wait-and-see approach.
Inflation may ultimately move lower, especially if housing costs cool down. While lower inflation might be expected based on broader home price trends, it has not been evident in inflation indices. The FOMC is currently being patient and waiting for more progress from inflation data before considering rate cuts, with a robust jobs market being a key factor in their decision-making process.
No move in interest rates is expected at the Fed’s May meeting, but fixed income markets anticipate one or two interest rate cuts before the end of 2024. This forecast reflects a shift from earlier projections, with interest rate cuts now potentially starting in July or more likely September. The recent unsupportive inflation data has led FOMC policymakers to signal that interest rate cuts may come later than previously expected, with PCE inflation data possibly supporting this direction.
The shift in interest rate cut expectations is primarily driven by unsupportive inflation data, but the strength of the jobs market also plays a role. The jobs market has proven to be more robust than forecast, alleviating some pressure on FOMC policymakers to cut interest rates. This delayed timeline for interest rate cuts in 2024 is also a factor in recent equity market weakness, as investors adjust their expectations based on economic data and FOMC signals.
Overall, the lack of disinflationary progress in 2024 and concerns about achieving the 2% annual inflation goal have led to a more cautious approach from the Federal Reserve regarding interest rate cuts. Investors are now looking towards the future meetings of the FOMC to see if and when interest rate cuts may be announced, with inflation data continuing to be a key factor in the decision-making process.
