The price index favored by the US Federal Reserve (Fed) has turned higher than the market expected, and has turned to an upward trend from the previous month. US inflation is stuck at 4-5%, much higher than the Fed’s target of 2%. As a result, the market, which predicted a freeze in June, also began to shift its center of gravity to ‘rising interest rates’.
On the 26th (local time), the US Department of Commerce announced that the core personal consumption expenditures (PCE) price index rose 0.4% in April from the previous month. This is a figure that bypassed the US Wall Street estimate (0.3%). Core inflation refers to the price trend excluding energy and food, which are highly volatile.
The year-on-year core PCE price index also rose again to 4.7% from 4.6% the previous month. The core PCE price index is the indicator on which the Fed bases its inflation policy target. That’s far above the Fed’s 2% target. The April headline PCE price index, which includes energy and food prices, also rose 0.4% month over month and 4.4% year over year. This is the part where the analysis shows that US inflation has not come down between 4 and 5 percent.
The fact that personal consumption spending in the US remains strong amid concerns about an economic recession also raises the risk of further tightening by the Fed. Personal consumption expenditures rose 0.8% in April compared to the previous month, far exceeding the market’s expectation of 0.4%.
Immediately after the announcement of the PCE price index, the probability of the Fed raising interest rates in June rose to more than 50% in ‘Fed Watch’, which gauges the Fed’s policy path through interest rate futures trading by investors. As the market continues to interpret the PCE indicator, it is seen as a ‘hawkish signal’, and as of 2:30 pm EST, the possibility of an increase in June has risen to 62.5%. Immediately after the Federal Open Market Committee (FOMC) of the Federal Reserve on the 3rd of this month, the probability of freezing was gradually decreasing due to signs of continuing high inflation after the possibility of freezing exceeded 90%, but the market still put weight on freezing.
As the recent banking crisis and debt ceiling issues are putting pressure on the financial market, the market’s consensus is that it will be difficult to avoid an increase in July even if it chooses to freeze in June. “This is the wrong direction for the Fed,” KPMG chief economist Diane Swonk told Bloomberg. June is focused on getting out of the debt ceiling problem, but the ‘July hike’ is on the way,” he said.
According to the previously released minutes of the FOMC’s May meeting, participants were found to have conflicting views on policy decisions in June as Impressionists and Freezeists. They say they are weighing between a slower-than-expected decline in inflation, an overheated labor market and the possibility of a credit crunch following the recent banking turmoil.
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.