Fed's Preferred Inflation Measure Comes In Cooler Than Expected As Banking Crisis Complicates Powell's Plan

The SPDR S&P 500 ETF Trust SPY SPY traded higher by 0.3% on Friday morning after the Bureau of Economic Analysis reported a 5% increase in the personal consumption expenditures price index in the month of February, suggesting the Federal Reserve still has a long way to go in its battle against inflation.

What Happened: The headline PCE rose 5% in February, down from 5.4% in January and a 2022 high of 6.8% in June. The February PCE reading came in below economist estimates of a 5.3% gain.

Core PCE, which excludes volatile food and energy prices and is the preferred inflation measure for the Federal Reserve, was up 4.6% in February, below economist estimates of a 4.7% gain.

Related Link: Are Hedge Fund Short Sellers Hunting And Targeting Specific Bank Stocks?

The latest CPI inflation reading comes after the Federal Reserve issued another 0.25% interest rate hike earlier this month, bringing its fed funds target range to between 4.75% and 5%. The bond market is pricing in a 55.8% chance of another 0.25% Fed rate hike in May.

The Federal Reserve is in a very difficult situation of attempting to continue to bring down inflation even as a banking crisis has undermined Americans' confidence in the financial sector.

At the Fed's post-meeting press conference in March, Fed Chair Jerome Powell said the Federal Open Market Committee is monitoring the credit market closely.

"Financial conditions seem to have tightened, and probably by more than the traditional indexes say. ... The question for us though is how significant will that be — what will be the extent of it, and what will be the duration of it,” Powell said.

Related Link: US Banks Face Regulatory Risks Following Silicon Valley Bank Collapse: BofA Names 4 Changes That Could Be Ahead

Earlier this month, the Labor Department reported a 6% increase in the consumer price index in February, down from a 2022 peak of 9.1% in June. The Labor Department also reported that U.S. wages grew 4.6% year-over-year in February.

Photo via Shutterstock.