After April 2021, the central bank’s preferred rate shows very low annual inflation

The Federal Reserve’s preferred rate of inflation cooled more than expected in May, a reassuring sign that the central bank may not need to raise interest rates much in the fight against red-hot prices.

The core personal-consumption expenditure price index, also known as the core PCE deflator, rose 0.3% in May, down from 0.4% in April and below expectations of 0.4% among economists surveyed by FactSet.

Headline PCE, which includes more volatile food and energy prices, rose just 0.1% from 0.4% in April, in line with economists’ expectations. Headline PCE rose 3.8% year-on-year, up from 4.4% in April, and in line with expectations. The core PCE deflator rose 4.6% year-on-year, up from 4.7% in April and below expectations for 4.7% growth.

The release will rattle investors’ nerves about how aggressive the central bank will be this year in tightening monetary conditions. After 10 consecutive interest rate hikes since March 2022, the central bank pressed the pause button in June, but has warned that further hikes may be needed to bring inflation under control.

Traders had been ramping up their rate hikes in July and September – spurred by strong economic data and recent comments from Federal Reserve Chairman Jerome Powell – but some of those hikes were canceled on Friday. The odds of a rate hike in July fell to 87% from 89% a day earlier, with odds on rates rising steadily to 13% from 11%, according to the CME FedWatch tool that tracks federal-fund futures. Thursday.

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The immediate market reaction was, to say the least, positive. Monitor the future

Dow Jones Industrial Average

An advance of 150 points, or 0.5%, extended gains ahead of the data release.

S&P 500

Futures rose 0.6%.

“While the immediate reaction in equity markets is positive, stubborn core inflation is poised to push 10-year and two-year yields higher,” said Quincy Crosby, strategist at LBL Financial. “The report confirms the July 26 rate hike as Jerome Powell had warned.”

On an annualized basis, core PCE of 3.8% is now the lowest level since April 2021—a sign of how much inflation has fallen since the measure was 7% in June 2022. However, inflation remains above the central bank’s target of 2%. target.

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“Right now, the Fed’s job is unclear. They may not be done with rake hikes, maybe they don’t have much work,” said George Mateo, chief investment officer at Key Private Bank. “Next week’s June employment report will be the next key data point to assess and the Fed’s It could be a key indicator in deciding the next move.”

Write to Jack Denton at [email protected]

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