Core PCE Spot In-Line – Still Too High. Stay The Course

Core PCE comes in at 0.249% m om, basically spot in line with expectations which isn’t surprising given most economists have nearly all the data ahead of time with the CPI and PPI releases.

This doesn’t really change much about the trajectory for the Fed coming into the June meeting from what they have been saying over the last few weeks which is disappointment about the pace of returning inflation back down to 2% to start the year and thus the need to hold policy rates higher for longer in order to bring inflation down to target.

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, in addition to potential further rises in R* as a tool to tighten financial conditions further.

So what we have is an economy that has begun to stall out as the lagged impacts of monetary policy are starting to bite more segments of the economy in a larger way however given sticky inflation, we have a Fed that is not going to be providing any accommodation any time soon. Folks need to understand the Fed’s reaction function in a high inflation world is different from what existed before Covid in a low inflation world.

I still contend this is a challenging setup for risk assets in the coming weeks especially as we continue to get data next week that shows the labor market holding in well while pricing pressures remain elevated.

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