The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures price index, remained at its lowest level in nearly three years last month.
The headline PCE inflation remained anchored at 2.6% on an annual basis in December, the Bureau of Economic Analysis said Friday, aligning with market forecasts. Notably, core inflation, which excludes volatile components like energy and food, edged down to 2.9%, modestly falling below expectations and underscoring the ongoing disinflationary forces at play.
In the wake of the inflation report, notable economists are weighing in, offering insights into the data’s implications for monetary policy and the overall market outlook.
Big Picture Trends: Alfonso Peccatiello, founder of The Macro Compass, advised looking beyond short-term fluctuations. He highlighted the six-month and three-month annualized trends at 1.9% and 1.5%, respectively, and said: “Cuts are coming.” This comment suggests an anticipation of a shift in monetary policy.
Favorable Economic Sweet Spot? Mohamed El-Erian, chief economic advisor at Allianz, said the December data is “in line with what have been pretty consistent upside surprises for U.S. economic activity.” El-Erian highlighted the division in economic perspectives: some believe the U.S. is nearing the end of a favorable period, while others see a strong foundation for continued economic strength.
Positive Outlook for Fed, Markets: Larry Tentarelli from Blue Chip Daily views the data as a positive sign. “With Core PCE at 2.9% Y/Y versus a Fed funds rate of 525-550, today's inflation report gives the Fed a path to cut interest rates,” he said. Tentarelli anticipates potential rate cuts, depending on upcoming economic and jobs data.
Balanced Fed Response Expected: Jeffrey Roach, chief economist of LPL Financial, sees the data as affirming for the Fed. “The improving inflation trajectory is improving, giving the Fed leeway to cut rates this year,” he said. Roach did sound a cautionary note about potential short-term fluctuations in goods inflation.
Inflation Normalization And Fed's Caution: Quincy Krosby, global chief strategist at LPL Financial, commented on the core inflation trends nearing the Fed’s target, suggesting the Fed will likely continue its watchful approach. “Expectations remain that the Fed will be discussing ‘when’ — not ‘if’ — to initiate its rate cut cycle,” she said.
Optimistic But Guarded Fed Stance: Bill Adams, chief economist for Comerica Bank, provided a hopeful yet cautious perspective. “Chair Powell and the Fed's other policymakers will come into the office for next week's FOMC meeting with songs in their hearts,” he said, highlighting the positive mood due to inflation trends. He expects the Fed to maintain a strong stance on inflation control.
Monetary Policy Is Too Restrictive Now: Charlie Bilello, chief market strategist at Creative Planning, showed the difference between interest rates and core PCE inflation — what it is also known as the real interest rate — is now equal to 2.3%. This is “the most restrictive monetary policy we’ve seen since September 2007,” he said, alluding to his preference for upcoming rate cuts.
Market Reactions: Stocks Mixed, Bonds Fall
Investors did not embrace the December PCE report with excessive optimism and were likely unsettled by the simultaneous surprise stemming from the personal spending data, which surged by 0.7% in December, exceeding market expectations of a mere 0.4% increase.
As a result, Treasury yields experienced an uptick of approximately 4-5 basis points across maturities, leading to losses in the fixed-income market. The iShares 20+ Year Treasury Bond ETF TLT registered a 0.4% decline in the initial hour of trading on Friday.
Stocks displayed a mixed performance, with both the S&P 500 and the Nasdaq 100 showing slight declines, while blue-chip and small-cap stocks made gains.
The SPDR S&P 500 ETF Trust SPY and the Invesco QQQ Trust QQQ will be fighting for their seventh consecutive positive session and their 12th out of 13 positive weeks.
Jerome Powell and Wall Street illustration. Photo: Federalreserve/Flickr Photo: Bylolo/Unsplash.
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