Cooling inflation data means the Fed is in position to cut rate in June, chief economist says

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on November 1, 2023.

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Cooling inflation data means the Fed is in position to cut rate in June, LPL’s chief economist said.
The PCE index, which is the Fed’s preferred inflation gauge, decelerated to a 0.3% monthly increase, down from 0.5% in January.
Services spending has slowed which indicates that growth in consumer spending will ease in the coming months, Jeffrey Roach said.

The latest inflation data has rolled in in line with expectations, and it’s good news for those waiting on rate cuts.

The Personal Consumption Expenditures index — which is the Fed’s preferred inflation gauge — decelerated to a 0.3% monthly increase, down from 0.5% in January. That cooling means there’s less pressure to keep rates at their presently elevated level.

“By the time the Fed meets in June, the data should be convincing enough for them to commence its rate normalization process,” Jeffrey Roach, chief economist for LPL Financial, wrote in a note on Friday. “But where we sit today, markets need to have the same patience the Fed is exhibiting.”

On an annual basis, the PCE index notched a 2.5% increase, compared to the 2.4% recorded last month. In fact, for the last four months, the PCE index has recorded declining increases. However, excluding volatile categories like food and energy, the PCE index continued its decline, rolling in at 2.8% year-over-year.

Breaking it down, the report showed that prices are slowing in core services, which Roach expects to continue sliding lower for the rest of the year. That’s a positive sign because it certainly means the Fed doesn’t have much reason to hike rates, unlike some “fringe groups” have suggested, he wrote.

Services spending has also returned to pre-pandemic trends, the data shows. That’s another green flag: it signals that disposable incomes are moderating, which means consumer spending growth should slow down in the coming months, Roach said. That’s notable given that consumers are a big driver of the US economy.

“This is overall good news for markets,” Roach said.