PCE data released, interest rate cut in June is final?
Let’s first focus on the Fed’s favorite inflation gauge, PCE. Through this PCE, let’s explore whether the Federal Reserve will really cut interest rates in June as the market expects? How will the PCE data affect this time, and what will be Powell's attitude at the Federal Reserve meeting?
Data show that in December, nominal PCE increased by 0.2% month-on-month and 2.6% year-on-year. The more important core PCE also increased by 0.2% month-on-month, and the year-on-year increase fell to 2.9%. Because with CPI and PPI, PCE can be directly derived, so there are no surprises in this data. Nick, the Fed’s spokesman, said, why did the discussion of interest rate cuts come so quickly? Because in June, most members of the Federal Reserve still thought that the core PCE at the end of the year would be 3.9%, so the Fed interest rate may have to be raised one more point, to 5.6%. As a result, if you look at it now, the core PCE in 2023 is only 3.2%, which is significantly lower than expected at the time.
Now, both the 3-month and 6-month core PCE are below the Fed's target on an annualized basis, with the 3-month annualized rate at 1.5% and the 6-month annualized rate at 1.9%. And we know that Powell said at the last meeting that they will not wait until the 12-month core PCE falls back to 2% before cutting interest rates. So now that it is already below the target for at least 6 months, how long does the Fed have to wait?
I specifically calculated it. If you look at the PCE table, the annualized core PCE for 8 months is only 2.1%, while the annualized for 7 months is already less than 2%. If we assume that the month-on-month increase in core PCE in January and February is the same as this month, 0.2%, then the core PCE before the Fed’s March meeting has a 10-month annualized rate of only 2.16%. If any one month is 0.1%, then the 10-month annualized rate is 2.04%. At this time, at least from the perspective of inflation, the Fed has basically found no reason not to cut interest rates.
Of course, some would argue that the economy is still strong, which may cause the Fed to hesitate. Indeed, in the December PCE report, personal consumption expenditures rose by 0.7% month-on-month, much higher than the 0.4% increase last month, which means that Americans are still spending money. The vice president of Capital Economics said that the Fed's goal is not to slow down the economy, but to control inflation. Squeezing the economy is just a by-product of controlling inflation. Now it seems that this by-product no longer exists.I think the Fed will welcome strong economic growth and the current inflation trend.
The Fed has basically been catering to the market during this period, and the data is also very cooperative, so this time should be similar. Powell has no reason to suppress the market. The way to cater to the market is most likely to be expressed as not denying the possibility of a rate cut in March. But compared to whether it is a rate cut in March or in May, I am more concerned about one question. That is, does the Fed care more about the real interest rate level or the economy?
If the Fed cares more about the real interest rate, then it means that the decline in inflation will lead to further interest rate cuts by the Fed, because the real interest rate will rise as a result. Previously, Powell and the chairman of the New York Fed said that the real interest rate should be maintained in a reasonable range to prevent excessive suppression of the economy. But if you care more about the economy, then you can slowly reduce it. Now that economic growth is so strong, the Fed does not seem to need to cut interest rates.
