5 Economists React To PCE Inflation: What Actions Will The Fed Take After May Meeting?

The Personal consumption expenditure (PCE) price index grew 0.1% in April from the previous month and 4.2% annually, according to the Bureau of Economic Analysis. That's down from 5% in February and falling short of economist expectations of a 4.6% increase.

The price index for core PCE, the Federal Reserve's preferred inflation gauge that excludes food and energy, rose 0.3% monthly and 4.6% annually — slightly softening from 4.7% in February but surprising economist expectations of 4.5%.

Despite the stronger-than-expected print, the slowdown in the rate of inflation led risky assets higher, with the SPDR S&P 500 ETF Trust SPY gaining 0.5%, and Treasuries yields lower, with the iShares 20+ Year Treasury ETF TLT surging 1.7%.   

Chart To Watch: Core PCE Inflation Rises Above Headline PCE One, Signaling Sticky Price Pressures

How Economists Reacted

• The latest PCE data "may throw a monkey wrench into markets expectations of pause in June," Gina Bolvin, president of Bolvin Wealth Management Group, said. If Powell reiterates "more work to be done," the market might very likely tumble back, damaging growth-oriented equities and interest-rate sensitive assets such as technology and bonds, she added.
• Jamie Cox, managing partner for Harris Financial Group, says there is no need for the Federal Reserve to hike next week. Rate hikes have gone too far and too fast, and the Fed should re-orient its policy towards preserving growth, he explained.
• Expect a 25-basis-point hike next week, Jeffrey Roach, chief economist for LPL Financial, says. The slowdown in business activity and signs of a softer job market will likely force the Fed to consider ending its current rate hiking campaign later this year, he added.
• The PCE numbers put another 25 basis points hike in play for June, LPL Financial, chief global strategist Quincy Krosby said. The inflation dynamics are "still not moving quickly enough for the Federal Reserve to declare victory," he added. "Markets have begun to accept that another move in June could push the economy closer towards a recession."
• Comerica Bank chief economist Bill Adams highlighted that core inflation is persistently high and believes the Fed is in a tough spot. The economy is cooling, but inflation is too high, Adams wrote in a note. This trade-off will be solved with the "Fed choosing ice over fire... Tight monetary policy that will further soften the economy, more likely than not, into a recession later this year." The Fed will downplay the probability of rate cuts this year, while acknowledging that they remain data dependent.

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