The Fed** described the path to its 2% inflation target as "bumpy," but higher-than-expected inflation data could make the picture even more bumpy.
New data released on Thursday morning will determine whether the spectacle is about to get tougher.
According to economists, the Fed's preferred measure of inflation, the "core" personal consumption expenditures (PCE) index, which excludes fluctuations in food and energy, is expected to grow at 2 percent year-over-yearThe 8% rate reports data for January.
Although slightly lower than 2 in December last year9% year-on-year growth, but expected 04%, up from 02%。
This could raise concerns that inflation is not coming down fast enough. According to Bank of America, this could also make the six- and three-month annualized inflation rate exceed the Fed's 2% target again.
The new PCE data will be crucial for investors as they try to determine when banks will begin easing their monetary policy after the most aggressive inflation-reduction campaign since the 1980s.
Markets began betting on six rate cuts starting in March at the start of the year, only after cautious comments from Fed Chair Jerome Powell and other Feds** and inflation data that exceeded expectations, that markets pivoted to the three rate cuts starting in June.
January's Consumer Index (CPI) was higher than economists expected, as was the Producer Index (PPI), which tracks what businesses use to make products and services.
Because of the correlation between the producer** index and personal consumption expenditures, there is a "risk" — according to Wilmer Stise, a bond investment manager at Wilmington Trust — that personal consumption expenditures "could be higher" when this data is released this Thursday.
If the personal consumption expenditures data is indeed high and the U.S. employment data continues to beat expectations, Stith added that the Fed may decide to keep interest rates higher for longer.
"I don't think they're going to raise interest rates," he said. "But maybe the Fed will be a little bit more restrained and reduce the number of rate cuts from three to two. ”
Last week, several Feds** mentioned recent inflation data as evidence that the path to 2% would be "bumpy," including Fed Vice Chair Philip Jefferson and Regulatory Vice Chair Michael Barr.
Fed Governor Christopher Waller raised the question of whether the January data was a more serious "roadblock" or a "pothole", stressing that banks should be cautious when it comes to cutting interest rates.
"I need to look at two or three more months of inflation data before I can tell whether the hot inflation data for January is a speed bump or a pothole," he said. ”
In the days leading up to the PCE, the Fed made more cautious noises.
Federal Reserve Governor Michelle Bowman said on Tuesday that the Fed is not yet ready to cut interest rates, and cutting rates too quickly could lead to the need for a rate hike later.
She added that she was also willing to raise interest rates if inflation progress stalled or reversed.
Kansas City Fed President Jeff Schmidt said Monday night in his first speech since assuming the role last year that "I don't think we're out of the woods when it comes to high inflation."
So far, he said, the decline is due to the fact that the supply chain has recovered from the trauma of the pandemic. He said he believes that services** – which account for two-thirds of total consumer spending – are still growing rapidly against the backdrop of a strong job market and faster wage growth**.
"With inflation above target, a tight labour market and demand showing considerable momentum, I personally don't see the need to pre-adjust the policy stance," he said. ”
Matt Lusetti, chief U.S. economist at Deutsche Bank**, said he expects PCE to rise 36 basis points month-on-month in January and fall to 2 percent year-on-year8%。
He said the data was already reflected in the Fed's view.
"Some ** are becoming more cautious about the strong performance unleashed by the data at the beginning of the year, which makes us more certain of our base point that the first rate cut will happen at the June meeting, not sooner," he said. ”