A key measure of U.S. inflation, the personal-consumption expenditures (PCE) price index, rose as anticipated in February, prompting speculation about whether the subsequent price growth will be moderate enough in the coming months to warrant an interest-rate reduction by midyear.
The Commerce Department reported that the overall PCE price index increased by 2.5% over the 12 months through February, aligning with expectations from economists surveyed by The Wall Street Journal. Similarly, core prices, which exclude volatile food and energy prices, rose by 2.8%, also in line with forecasts.
Federal Reserve Chair Jerome Powell, speaking during a Q&A session at the San Francisco Fed, expressed satisfaction with the data being consistent with expectations. In January, the overall PCE index had seen a 2.4% rise from a year ago.
While Fed officials have reaffirmed their projections for three interest-rate cuts this year, the timing of such moves remains uncertain. Powell reiterated the need for more inflation data before confidently asserting that price growth is on track to return to the central bank’s 2% goal.
Powell emphasized that with solid economic activity, there’s no urgency to rush into rate cuts. He stressed the importance of carefully monitoring inflation trends before making any decisive moves.
In February, the PCE price index saw a 0.3% increase from January, slightly below the 0.4% anticipated by economists. The core index also rose by 0.3%.
Although stock and bond markets were closed for Good Friday, optimism prevails that the Fed can effectively manage inflation without risking a recession. This optimism has contributed to driving the S&P 500 to record highs. The yield on the benchmark 10-year Treasury note settled slightly lower on Thursday, indicating investor confidence in the Fed’s ability to navigate economic challenges.
Market participants, as indicated by CME Group, have priced in a 64% chance of a rate cut by June.
Powell highlighted that the Fed has maintained a measured approach, neither overreacting to lower-than-expected inflation readings nor to stronger-than-anticipated data earlier this year. He emphasized that the Fed’s interest-rate strategy allows flexibility to respond to various economic scenarios, whether that entails more aggressive rate cuts in the event of a sharp economic slowdown or maintaining rates longer if inflation does not ease as anticipated.