It will be interesting to see whether the markets can completely ignore the hawkish speeches of Waller (last Wednesday) and Powell (Friday), and the hot February PCE inflation (Friday).
PCE turned out to be in line with expectations (no surprise after February CPI and PPI), but it is difficult to say that we are on a fast track to the 2% target.
All in all, there is a risk that the FED will not cut rates in June - this will depend on inflation data for April and May.
Waller: „PCE inflation jumped to 0.4 percent on a monthly basis in January, after averaging around 0.1 percent in October through December last year. And with February consumer price index (CPI) and producer price index inflation data in hand, some forecasts are predicting core PCE inflation may be revised up for January and is expected to come in at 0.3 percent for February, which we will learn about on Friday”.
And unfortunately, for January we had an upward revision of core PCE (from 0.4156% to 0.45218%), in February core PCE was 0.2615%.
Waller: ”In trying to judge what the underlying trend is for inflation, I tend to look at annualized core measures over 3 or 6 months. (..) These shorter-term inflation measures are now telling me that progress has slowed and may have stalled”.
After February's data, 3-month core PCE is 3.52% (it was 1.55% in December), and 6-month core PCE is 2.89% (it was 1.88% in December) – Figure 1.
Figure 2 shows YoY and monthly changes. 12-month core PCE is 2.78%.
Waller: “I see no rush in taking the step of beginning to ease monetary policy. (…) The risk of waiting a little longer to cut rates is significantly lower than acting too soon. (…) As a result, in the absence of an unexpected and material deterioration in the economy, I am going to need to see at least a couple months of better inflation data before I have enough confidence that beginning to cut rates will keep the economy on a path to 2 percent inflation. Fortunately, we can wait to see how the data come in before deciding the appropriate time to start lowering the policy rate”.
Powell on the first cut: “(…) with the economy you know growth is strong right now, the labor market is strong right now, and inflation has been coming down we can and we will be careful about that decision because we can be. (…) I think we are in position now where we can handle whatever case comes.”
“I don’t think rates will go back down to the very very low levels they were at before the pandemic (…) this economy doesn’t feel like it’s suffering from the current level of rates”
Powell on recession:
“ (...) there’s always a sort of unconditional probability of a recession in the next year so the real question is if you look through history it’s not possible to rule a recession out for a long period of time so … is the possibility of a recession elevated at the current time and I would say no (…)”.
Figure 3 shows the main PCE inflation series.
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