Are Rate Cuts Imminent After Fed's Preferred Inflation Data Holds Steady? 'Be-Careful-What-You-Wish-For Moment' (CORRECTED)

Editor’s note: This story has been updated to correct the spelling of economist Joseph Brusuelas’ name.

The Personal Consumption Expenditure (PCE) price index, a preferred inflation gauge for the Federal Reserve, revealed a steady trend in April, aligning with economist expectations and slightly easing concerns about broader price pressures.

The headline inflation rate was reported at 2.7%, while the core PCE inflation, which excludes food and energy and serves as a key metric for the Fed, remained at 2.8%.

Concurrently, personal income and spending growth rates decelerated, indicating a potential weakening in consumer health. Moreover, the Chicago Business Barometer, commonly referred to as the Chicago PMI, fell from 37.9 to 35.4 in May 2024, significantly underperforming market expectations and recording its lowest level since the pandemic-related drop in the second quarter of 2020.

As a result, Treasury yields tumbled and bond assets rallied, with the iShares 20+ Year Treasury Bond ETF TLT up 0.9%. Stocks weakened, with the SPDR S&P 500 ETF Trust SPY down 0.3%.

This raises a critical question: are rate cuts on the horizon, or should investors brace for prolonged higher interest rates?

Here's how five economists and market experts interpret the data.

‘We Are In A Be-Careful-What-You-Wish-For Moment’

"The inflation data was the most anticipated and that came in right in line with consensus, but the spending numbers were a little less than expected," Chris Zaccarelli, chief investment officer, Independent Advisor Alliance, commented.

He noted a collective sigh of relief as inflation did not exceed expectations, hinting at potential good news if slowing consumer spending leads to lower inflation.

However, he cautioned, "We are in a be-careful-what-you-wish-for moment because if slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result then that will be good for markets."

The risk, he warned, is that a rapid slowdown in consumer spending and the economy could adversely impact corporate profits and stock prices faster than the Fed could react with rate cuts.

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Still No Cuts In The Horizon

Larry Tantarelli, chief technical strategist at Blue Chip Daily Trend Report, stressed that while the data trends slightly lower, the reduction is marginal: "This figure was 2.9% in December, so it has only come down by 10 basis points in 5 months."

He highlighted constructive signs in personal spending figures and outlined a cautious stance on rate cuts.

"Our view is that the Fed might not cut interest rates in 2024. One of two conditions that we would want to see to change this view: 12-month core PCE comes down to 2.4% or lower in the second half of 2024, or the unemployment rate ticks up over 4.2%."

He emphasized the Fed's data dependency and the equity market’s resilience without rate cuts, suggesting the Fed would prefer maintaining higher rates to ensure inflation targets are met.

‘Setting Up For A Fall Rate Cut By The Fed’

Joe Brusuelas, chief economist at RSM US LLP, anticipated a near-term rate cut: "Spending slowing and near miss on a 0.2% supports the idea that we are setting up for a Fall rate cut by the Fed."

He attributed sticky service inflation to early-year data noises and predicted a decline in rent inflation by summer.

Brusuelas forecasted the Fed's rate-cutting cycle to start in September, potentially initiating with a 25-basis-point cut, and continuing with gradual reductions.

"We see the Fed kicking off its rate reductions in September… Based on our model, though, we would be comfortable if the Fed began its multiyear rate-cutting cycle in July, ending at a rate of near 3% in 2025−26."

Revising Fed Cut Projections Down In June’s Dot Plot

Macro traded Craig Shapiro stated on social media X that the core PCE figure closely matched expectations: "Core PCE comes in at 0.249, basically spot in line with expectations."

He indicated that this steadiness aligns with the Fed’s recent communications about maintaining higher policy rates to tackle persistent inflation.

"That means we are going to be removing interest rate cuts from the Dot plot at the June meeting for 2024 and probably 2025 as well."

Shapiro noted the stalling economy due to lagged effects of monetary policy, suggesting the Fed is unlikely to provide any monetary easing soon.

He foresees challenges for risk assets as labor market strength and elevated pricing pressures continue.

Global Debt Levels Are At ‘Napoleonic War Levels’

James E. Thorne, chief market strategist at Wellington Altus, provided a stark assessment, citing the current core PCE at 2.75% amidst significant fiscal deficits. "Real consumer spending negative. Federal funds rate at 5.37% and a Real interest rates at 2.7% is insanity when Global Debt levels are at Napoleonic War levels."

Thorne emphasized the long lags of monetary policy, suggesting the current economic conditions are far from ideal and highlight the complexities of managing high debt levels and fiscal deficits.

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