Mixed Bag of PCE Inflation Likely Seals the Fate of H1 Rate Cuts

The Personal Incomes and Outlays report for March 2024 continued giving the Federal Reserve reasons to keep interest rates fixed for the time being. That likely means none of the expected rate cuts until July at the very soonest.

Personal consumption expenditure (PCE) were up 0.8% month over month. The PCE index, the favored inflation metric for the Fed, were up 0.3% month over month as they were in February, following a 0.4% increase in January. On an annual basis, PCE was up 2.5% in March. Take out food and energy to reduce volatility and it was 2.8%.

Dollar PCE in March was $160.9 billion, including $80.6 billion in services and $80.3 billion in goods. Real disposable personal income (DPI) was up 0.2% in March and real personal consumption expenditures (PCE) was up 0.5%.

“The hot inflation readings through March should write off any rate cuts in the first half of 2024,” said Nationwide Senior Economist Ben Ayers in an emailed note. “Given the momentum for the economy and prices, we don’t expect the Fed to strongly consider easing monetary policy until its September meeting at the earliest. There is also a risk that the further economic resilience pushes off any rate declines until 2025, a key downside risk for growth next year.”

“Both the overall and core PCE prices indexes rose by a strong 0.3 percent in March, a continuation of the hotter inflation trends in early 2024,” Ayers added. “This kept the year-on-year readings for both PCE measures just below 3.0 percent. But the recent trend is more concerning, with the 3-month annualized rates for the overall PCE and core PCE jumping to 4.4 percent in March.”

“Most disconcerting for the Fed, and it will be interesting to hear Powell’s remarks on this during his press conference on Wednesday, is that goods deflation looks to have ended,” wrote Steven Blitz, managing director of global macro and chief U.S. economist at GlobalData.TS Lombard. If so, that means one of the forces that has been slowing inflation may no longer be in effect.

“Given the elevated levels of inflation – and this is the new normal for 2024 – the market is going to need to get over hopes for Fed rate cuts,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in an emailed note. “Yes, they may cut once (or not at all), but there is no possibility the Fed is going to cut rates 3 or more times, unless we go into recession.”