Fed Rate-Cut Bets Rise

The Federal Reserve’s preferred measure of underlying inflation rose in December by the least in almost three years, adding to bets the Fed will cut interest rates this year.

Core Data Showed Modest Gains, Adding to Soft-Landing Hopes

The core personal consumption expenditures price index rose 2.9% from a year earlier, the smallest gain since March 2021. Personal spending climbed 0.7% from the prior month, the most since September 2023. Traders trimmed bets on Fed rate cuts in the wake of the data. Rate futures traders continued to see a rate cut in May as the most likely first move, with a March cut seen as a bit less than 50-50 chance.

“This was a decent PCE report,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The year-over-year core PCE below 3% is certainly encouraging as inflation continues to moderate toward the Fed’s 2% target. Personal spending was strong, which will keep the Fed on hold and cautious about cutting rates anytime soon. I still believe the earliest a rate cut could happen is mid-to-late Q3. This report — coupled with yesterday’s GDP data — increases the odds of a soft landing, which continues to gain traction.”

Treasury yields, which move inversely to prices, rose across the curve after the data, with the 2-year, 5-year and 10-year rates all climbing. They were at 4.35%, 4.04% and 4.135%, respectively.

In the event of a mild recession, the spread between US investment-grade corporates and Treasuries could widen to 150 basis points from the current 94 basis points, according to Chris Alwine, global head of credit at Vanguard Group.

Pending home sales climbed in December by the most since June 2020, a separate report Friday showed, suggesting that stabilizing mortgage rates may be drawing in buyers. The average for the week ended Jan. 25 increased to 6.69%, but has held within a relatively tight range around 6%, according to Freddie Mac data.