Weekly Economic Trends and Indicators

The Headlines:

Conflicting readings on inflation are making the Federal Reserve’s decision on when to cut interest rates more difficult. The consumer price index (CPI) rose 0.4% in February and 3.2% over the last twelve months. Shelter prices (rent and owner’s equivalent rent) continue to boost inflation as they have throughout the last year. After removing the more volatile food and energy components, the core CPI was also up 0.4% in February.

The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index jumped in January with a 0.3% increase after three months of almost no increase. Even so, the twelve-month inflation rate in the PCE was 2.4% and continuing to trend downward.

The Context:

As expected, the Federal Reserve did not make any change to the target fed funds rate last week. The anticipation was primarily concerned with what Chair Powell would say at the press conference after the meeting. The strong labor market number and the stubbornness of inflation had pushed back expectations of an eventual rate cut. The phrase “higher for longer” was creeping back into the vocabulary of the market.

If you were looking for some hope that the rate cuts might come sooner rather than later, you were rewarded last week. The information released after the meeting included the committee’s “Summary of Economic Projections”(SEP), also referred to as the “dot plot.” The SEP showed that the majority of the committee expects at least 75 basis points of rate cuts yet this year. With only six meetings remaining, and with the expectation that the cuts will only be 25 basis points at a time and probably not at every meeting, this would suggest a first cut in the summer. The CME FedWatch tool reflected the market’s new expectations as the probabilities of a cut in May or June increased compared to a week ago.

In the press conference, Chair Powell walked a fine line. While his overall tone was slightly more “doveish”, he pointed out (as he has in the past) that cutting rates too soon risks reigniting inflation. As for the Fed’s inflation projections, the SEP reported that the median member of the committee expects PCE inflation to fall to 2.4% this year, 2.2% next year and 2% in 2026. Clearly the committee members feel that the remaining progress to 2% will be slow (and as Powell indicated “bumpy”), but that we are moving in the right direction even as they begin to cut the policy rate this year and continue on that path next year.

Powell also noted the strength of the labor market, and the SEP reported that the median committee member expects the overall unemployment rate to remain close to 4% this year and next. However, as we discussed last week, this could mean higher unemployment rates in some sectors.

Next week: Housing market update