Federal Reserve's Inflation Rate Rises, Further Eroding Chances for July Rate Cut

The Federal Reserve's primary inflation rate, the core Personal Consumption Expenditures (PCE) price index, increased more than expected in May. This development adds to the already slim chances of a rate cut by the Fed in July.

Core PCE Price Index: A Key Inflation Indicator

The core PCE price index is a widely watched indicator of inflation in the US economy. It measures the change in prices of goods and services, excluding food and energy costs. The Federal Reserve closely monitors this index to gauge underlying inflationary pressures in the economy.

May's Numbers: A Slightly Higher Increase

According to the latest data released by the Bureau of Economic Analysis (BEA), the core PCE price index rose 0.2% in May, exceeding the MarketLine forecast of a 0.1% increase. This represents the largest monthly gain since November 2022.

What Does This Mean for the Fed's Inflation Strategy?

The higher-than-expected inflation rate reinforces the Federal Reserve's resolve to keep interest rates on hold until inflation is under control. The core PCE price index has been steadily rising over the past year, with a recent surge in energy prices contributing to the increase.

Slim Odds of a July Rate Cut

Despite the moderate rise in the core PCE price index, the chances of a rate cut by the Federal Reserve in July remain slim. The Fed has indicated that it will keep interest rates on hold until inflation is within its target range, which is currently set at 2%.

Market Reaction: A Modest Rise for the S&P 500

The release of the core PCE price index data had a modest impact on the US stock market. The S&P 500 rose by 0.1% in response to the news, reflecting investors' growing confidence that the Fed will maintain its hawkish stance.

Inflation Expectations: A Key Driver of Market Sentiment

While the core PCE price index increase may have limited the chances of a rate cut, inflation expectations remain a key driver of market sentiment. Investors continue to monitor inflation data closely, as it can significantly impact interest rates and economic growth.

What's Next for the Fed?

The Federal Reserve's next policy meeting is scheduled for June 14-15. At this meeting, officials will likely reiterate their commitment to keeping interest rates on hold until inflation is under control. The core PCE price index data released in May underscores the importance of monitoring inflation closely and adjusting monetary policy accordingly.

Key Takeaways

• The Federal Reserve's primary inflation rate, the core PCE price index, rose more than expected in May.
• This development further erodes the chances of a July rate cut by the Fed.
• Despite the moderate rise in inflation, the S&P 500 rose modestly in response to the news.
• Inflation expectations remain a key driver of market sentiment.

Conclusion

The core PCE price index data released in May provides further evidence that the Federal Reserve is committed to keeping interest rates on hold until inflation is under control. While the chances of a rate cut in July remain slim, investors continue to monitor inflation closely and adjust their expectations accordingly.