Source: Golden Ten Data
Will the inflation data scheduled to be released this Friday allow the Federal Reserve to reconsider the option of cutting interest rates multiple times during the year?
Since this year, the market's expectations for the future direction of the Fed's interest rate policy have fluctuated like a roller coaster. The next potential fluctuation may occur this Friday. At that time, the US will announce the PCE price index, the most popular inflation index of the Federal Reserve.
Entering this week, the market expects the Federal Reserve to wait and see, according to hawkish comments in the May meeting minutes published last Thursday.
The minutes of the meeting showed that the Federal Reserve was shocked by the high inflation reports for January, February, and March. Some policymakers have even raised the possibility of interest rate hikes. Furthermore, “some” officials believe that financial conditions are not sufficiently restrictive to slow down demand and inflation, which is a risk.
Therefore, many people think that if the Federal Reserve actually cuts interest rates in 2024, it is more likely later this year, probably in December.
Evercore ISI Vice Chairman Krishna Guha said that the hawks and dovish in the Federal Reserve will keep a close eye on the data for the next 3-4 months to see who “wins this race.”
Guha said that the dovish view is that the surge in inflation in the first quarter was mainly “lagging behind” and that the economy and job market are slowing down. Under such circumstances, the Federal Reserve may still cut interest rates. He added that the hawkish argument is that the economy is still too strong to keep inflation down, and high interest rates are expected for a longer period of time.
Traders in the derivatives market now expect the Federal Reserve to cut interest rates only once this year. They expect a 50% chance of cutting interest rates in September, and even more likely to cut interest rates in November.
Michael Gapen, head of US economics at Bank of America's Global Research Division, said that the PCE price index is expected to improve from the poor performance of the first quarter, “but only slightly.”
The market expects the core PCE growth rate to be 0.2% month-on-month, slightly better than 0.3% in March. This will be the lowest level since December last year. Scott Anderson, chief US analyst at BMO Capital Markets, said:
“All in all, this report should be beneficial to the Federal Reserve, showing that a further slowdown in consumer demand and real income growth is gradually reducing core inflation and opening the door for several interest rate cuts later this year.”
Editor/jayden