December PCE

The US Bureau of Economic Analysis has released some critical data detailing December's Personal Consumption Expenditures (PCE) Price Index. This data is particularly significant as it is the Federal Reserve's preferred inflation gauge. According to Reuters estimates, market analysts predict that the core PCE inflation, which excludes volatile food and energy prices, will rise by 0.3% every month and forecast the annual rate to decline to 4.4% from 4.7% in November. The actual numbers came in at 0.3% every month and 4.4% annually, and everything aligned with expectations.

This expectation of a decrease in inflationary pressure aligns with data released earlier in the month by the US Bureau of Labor Statistics, which reported that the Core Consumer Price Index (CPI) edged lower to 5.7% from 6% in December. As a result, it should not come as a surprise if the PCE inflation reading is relatively soft. Furthermore, markets have been pricing in a less aggressive Federal Reserve policy tightening since the release of this data.

The Federal Reserve's January Federal Open Market Committee (FOMC) meeting is fast approaching, and there is widespread anticipation that the central bank will slow the pace of interest rate hikes. This expectation is primarily based on the CME's FedWatch tool, which currently forecasts a 99.1% probability that the Fed will raise rates by only 25bps, with only a 0.9% probability that they will raise rates by 50bps.

The Federal Reserve has also been transparent about its plans for future interest rate hikes. In December of last year, the central bank released its economic projections, which stated that they expect to take their benchmark rate just above 5% and not reduce that level for the entire year. This level could also extend into the first or second quarter of 2024. This projection suggests that the Fed may be taking a more cautious approach to interest rate hikes to avoid the over-tightening monetary policy and potentially slowing economic growth.

The question is whether the Federal Reserve will keep interest rates high for the rest of the year or adjust its policy based on new data showing a decrease in inflation.