The Federal Reserve’s preferred measure of inflation cooled more than expected in May, a reassuring sign that the central bank may not have to raise interest rates much more in its fight against red-hot prices.
The core personal-consumption expenditures price index, also known as the core PCE deflator, rose 0.3% month over month in May, down from 0.4% in April and below expectations of 0.4% among economists surveyed by FactSet.
Headline PCE, which includes more volatile food and energy prices, rose just 0.1%, down from 0.4% in April and in line with economists’ expectations. Headline PCE was up 3.8% year over year, down from 4.4% in April and also in line with expectations.The core PCE deflator rose 4.6% year over year, down from 4.7% in April and below expectations of 4.7% growth.
The release should temper investors’ nerves about how much more aggressive the Fed will be this year in tightening financial conditions. After 10 consecutive rate hikes since March 2022, the central bank hit the pause button in June but has warned that further increases may be necessary to get inflation under control.
Traders have been increasing their bets of rate hikes in July and September—spurred on by strong economic data and hawkish recent remarks from Fed Chairman Jerome Powell—but some of those wagers are coming undone on Friday. The chances of a rate hike in July have edged down to 87% from 89% a day ago, according to the CME FedWatch Tool, which tracks federal-funds futures, with the odds of rates being held steady rising to 13% from 11% on Thursday.
The immediate market reaction, at least, has been positive. Futures tracking the
Dow Jones Industrial Average
advanced 150 points, or 0.5%, extending gains from before the data release.
S&P 500
futures rose 0.6%.
“While the immediate reaction in equity markets remains positive still stubborn core inflation remains intact pushing 10-year and two-year yields higher,” said Quincy Krosby, a strategist at LPL Financial. “This report underpins a July 26 rate hike as warned by Jerome Powell.”
On an annual basis, core PCE at 3.8% is now at the lowest level since April 2021—a sign of how far inflation has come down since that metric peaked at 7% in June 2022. Nevertheless, inflation still remains above the Fed’s 2% target.
“Right now, the Fed’s job is not clear-cut. While they may not be done with rake hikes, perhaps they don’t have much more work to do,” said George Mateyo, the chief investment officer at Key Private Bank. “Next week’s June employment report will be the next major data point to assess and likely the key indicator in determining the Fed’s next move.”
Write to Jack Denton at [email protected]
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