More recently, the Federal Reserve has continued to reaffirm its commitment to the long-run goal of a 2.0% inflation target. This target is measured by the headline Personal Consumption Expenditures (PCE) data. This announcement comes at a time of increased economic anxieties underscored in the Fed’s last meeting. The central bank’s favorite measure, the Core PCE, is forecast to remain flat month-over-month. In real terms, however, we will likely see a decrease when looking at year-over-year data. The Fed has already lowered its growth forecasts and raised its inflation forecasts. They are now looking for two rate cuts this year, which is what the money market is now pricing in. At the same time, dot-plot shifts suggest some increase in participants’ belief that there will be no cuts this year.
On the other side of the Atlantic, the United Kingdom's services and manufacturing sectors are projected to experience a slight decline in PMI readings for March. The UK's services PMI is expected to decrease to 50.9 from February's 51.0, while the manufacturing PMI is anticipated to dip to 46.4 from 46.9. The Bank of England’s monetary policy committee unanimously voted to hold its bank rate at 4.50%, the ninth consecutive meeting without a change. Yet, they cautioned that uncertainties in global trade have deepened.
Across the Atlantic, the same trends are looming large in the United States. Economists predict the services PMI will fall to 50.8, with the manufacturing PMI easing to 51.8. As alluded to above, the Fed is laser-focused on disinflationary data. For PCE they’re forecasting no change from the previous month of 0.3% MoM and 2.5% YoY.
The Fed's Inflation Strategy and Economic Forecasts
The Federal Reserve’s determination to maintain a 2.0% inflation target level demonstrates its tenacious approach to long-run economic stewardship. In order to control inflation, the Fed pays close attention to the headline PCE data. This deliberate approach creates the foundation for an environment that supports long-term, mutually supportive, strong, and shared economic growth. The Core PCE omits the more volatile food and energy prices. The Fed’s preferred measure is for good reason. It provides a clearer picture of the long-term inflation trend by smoothing out more volatile short-term inflation changes.
The most recent meeting of the Federal Reserve resonated with these same economic uncertainties. Together, these uncertainties have contributed to the recent downward revisions in expected growth and inflation. The Fed has already signaled that it expects growth to be weaker than previously forecast, and inflation projections have been raised. These amendments undoubtedly illustrate the complex interplay of domestic and international pressures driving change, including on our economy.
These two rate cuts later this year are consistent with the money market’s expectations. That points to the Fed proceeding with caution as it threads the needle between all of these unknowns. The dot-plot — the Fed’s preferred method for signaling interest rate expectations — has indicated an uptick in the number of dot-plot participants forecasting no rate cuts this year. This is a sign of some encouraging divergence in thinking among key policymakers.
UK Economic Outlook and BoE's Stance
In the United Kingdom, the fiscal picture is complicating the economic outlook. The expected decline in services and manufacturing PMI readings for March suggests a cooling of economic activity in these key sectors. The services PMI fell to 50.9, indicating a mini-expansion in that sector. At the same time, the manufacturing PMI dropped to 46.4, indicating that the industry is contracting.
Today the Bank of England announced that it will maintain the bank rate at 4.50%. Some of this new-found caution has been in reaction to spectacular rise global trade uncertainties. The 8-1 almost-unanimous vote at the BoE’s September meeting reflects a rapidly-growing consensus among policymakers. Others read the division as an indication of a more hawkish approach.
The BoE's focus on external risks underscores its concern over potential impacts on the UK economy from global trade tensions and geopolitical developments. Keeping interest rates where they are provides more room to react to changing circumstances.
US Economic Indicators and Market Reactions
In the United States, new economic indicators are set to provide important clues about where the nation’s economy is headed. The services PMI is forecast to come in at 50.8. That still signals continuing growth, albeit not as quickly as we’ve experienced in recent months. Likewise, the national manufacturing PMI is expected to continue its slide, dropping to 51.8, still signifying modest growth in the sector.
The PCE data, the Fed’s preferred measure of consumer spending and inflation, has stuck to a 0.3% growth rate for the month. On a year-on-year basis, this figure is 2.5%. At the same time, Core PCE is expected to hold steady m/m but increase y/y to 2.7%. These numbers are critical for the Fed as they serve as a measure of “core” consumer price trends and the overall direction of inflationary pressures.
Market participants continue to watch these developments very closely. They help determine monetary policy decisions and the mood of the overall economy. Investors and analysts alike are closely watching how these indicators match up or miss the mark with Fed expectations and projections.