Latest inflation numbers don’t rule out June rate cut, economists say

The Federal Reserve’s preferred inflation gauge moved in the wrong direction last month for the first time since September, but core inflation fell for the 13th consecutive month, to 2.8 percent.

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An inflation gauge that’s closely watched by Federal Reserve policymakers shows annual inflation drifted upward to 2.5 percent in February, moving further away from the Fed’s 2 percent target for the first time since September.

But the 0.3 percent month-over-month increase in the personal consumption expenditures (PCE) price index was in line with economists’ expectations, and a big improvement from January.

Friday’s data release also showed annual inflation eased in February when volatile food and energy prices were excluded.


The impact of the latest inflation numbers on mortgage rates will be a matter of speculation until next week, when bond markets where Treasurys and mortgage-backed securities that fund most home loans are traded reopen after being closed for Good Friday.

PCE and Core PCE trends

While the PCE price index is the Fed’s preferred measure of inflation, policymakers at the central bank also keep a close eye on Core PCE, which excludes the cost of food and energy.

Core PCE, which can be a more reliable indicator of underlying inflation trends, dipped for the 13th month in a row in February, registering 2.8 percent annual growth.

Upward revisions to December and January data show that Core PCE jumped 0.5 percent from December to January, but month-over-month growth cooled to 0.3 percent in February.

Moody’s Analytics Chief Economist Mark Zandi said the latest data from the U.S. Bureau of Economic Analysis “should ease concern” about the month-over-month jump in January core inflation.

Mark Zandi

Mark Zandi

In a post on the social media platform X, formerly known as Twitter, Zandi said that all in all, the numbers show that inflation “is firmly in the 2s, and headed to the Fed’s target.”

Economists at Pantheon Macroeconomics also think the latest numbers support a Fed rate cut in June.

Ian Shepherdson

Ian Shepherdson

“Our base case … is that the core PCE over the next few months will look much more like February than January,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients Friday. “If we’re right about that, and the labor market weakens anything like as much as is implied by the ongoing drop in small firms’ hiring plans, the Fed will be easing in June.”

But in remarks delivered Wednesday before the release of Friday’s PCE price index, Federal Reserve Governor Christopher Waller said he’s in no rush to start cutting rates. While the central bank “made a lot of headway toward our inflation goal in 2023,” the data he’s seen so far this year “has made me uncertain about the speed of continued progress.”

Waller: ‘There’s still no rush’ to cut rates

Waller — formerly characterized by Reuters as an inflation hawk, but now considered a centrist — said that the “remarkable U.S. economy keeps chugging along,” making it “a fairly easy decision to wait a little longer to get a better understanding of the trajectory of inflation” before cutting rates.

At their March 20 meeting, Fed policymakers indicated that while they won’t cut rates until they have more confidence that inflation is trending down, they still anticipate making three rate cuts this year. With six more meetings scheduled this year, the Federal Open Market Committee could wait until September before it starts cutting rates and still implement three rate cuts in 2024.

Among those rooting for lower mortgage rates, expectations that the Fed might begin slashing rates in May have evaporated, and futures markets suggest the odds of a June rate cut are also diminishing.

Futures markets tracked by the CME FedWatch Tool on Friday put the odds of a May 1 rate cut at 4 percent, while the odds of one or more rate cuts by June 12 have slipped to 63.6 percent, down from 75.6 percent on March 22.

“The risk of waiting a little longer to cut rates is significantly lower than acting too soon,” Waller said Wednesday at the Economic Club of New York. “Cutting the policy rate too soon and risking a sustained rebound in inflation is something I want to avoid.”

Federal Reserve Chair Jerome Powell said last week the central bank is also considering whether to taper the pace at which it unwinds its $7 trillion balance sheet, which could give mortgage rates room to fall.

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