New inflation reading could keep June rate cut on the table for Fed

The Federal Reserve's preferred gauge of inflation wasn't hotter than expected in February, which could keep a mid year interest rate cut on the table.

The year-over-year change in the so-called "core" Personal Consumption Expenditures index — which excludes volatile food and energy prices — clocked in at 2.8% for the month of February.

That was in line with economist expectations and down from 2.9% in January. Core prices rose 0.3% from January to February, which was also in line with expectations and down from 0.5% in the previous month.

The new PCE reading could be an encouraging development to some Fed officials who raised questions in recent months about the persistence of inflation after some hotter-than-expected numbers at the start of 2024.

"Core services inflation is slowing and will likely continue throughout the year," Jeffrey Roach, chief economist for LPL Financial, said in a note.

"By the time the Fed meets in June, the data should be convincing enough for them to commence its rate normalization process. But where we sit today, markets need to have the same patience the Fed is exhibiting."

Some Fed officials have been cautioning investors to be patient about the pace of rate cuts.

Fed Governor Chris Waller, for example, said Wednesday that he is in no hurry to cut and needs to see at least a couple months of better data before he has enough confidence that an easing of monetary policy will keep inflation on its path down to the Fed's 2% target.

"There is no rush to cut the policy rate,” Waller said in a speech in New York.

Investors currently are betting that the first rate cut will happen in June, after scaling back their predictions early in 2024 that the first cut would happen in March. As of Thursday, traders had the odds of a June rate cut at nearly 64%.

Waller is not the only one who has been urging cation. Atlanta Fed president Raphael Bostic also said last week he now expects only one rate cut this year and thinks that cut will happen later in the year than previously expected.

But other Fed officials have sounded more optimistic, including Fed Chair Jay Powell. He and Chicago Fed president Austan Goolsbee both said over the past week that the fundamental story about falling inflation had not changed despite hotter-than-expected readings in January and February.

Powell is set to speak again later today.

The Fed decided last Wednesday to hold interest rates steady and maintain projections for three rate cuts this year. Officials also raised their outlook for inflation and economic growth.

The decision to stay the course for three rate cuts this year — the same number of cuts forecast in December — comes after sticky inflation data was thought to push officials to scale back the number of cuts for 2024.

The concerns about that sticky data came from other gauges, such as the Consumer Price Index.

Core consumer prices based on CPI showed an annual increase of 3.8% in February after rising 3.9% in January.

These readings, while down from levels closer to 5.5% last year, are nearly double the Fed's 2% inflation target.

Friday's PCE readings, however, were closer to where the Fed wants to be. Non-core prices rose 0.3% from January to February, decelerating from a 0.4% increase the previous month.

Compared with 12 months earlier, non-core prices rose 2.5% in February, up slightly from a 2.4% year-over-year gain in January but in line with expectations.

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