At its March meeting, the Federal Reserve voted to keep the federal funds target interest rate range at 4.25%-4.50%. Combined with inflation measures still flashing warning signals, this decision has left investors with a collective breath held. So all market participants are looking at the next PCE inflation data with a very close eye. In February, analysts are projecting a 0.3% increase from the previous month and a 2.7% year-over-year increase. Particularly notable is the fact that this data is typically used as a primary input to inform the Federal Reserve’s policy decisions.
The Fed’s policy statement featured a newly-edited Summary of Economic Projections (SEP). This update provides a useful glimpse into the Fed’s longer-term monetary policy. The average forecast among policymakers is to lower the policy rate 50 bps in cumulative cuts by 2025. This is a big deal, if true, even as they unexpectedly raise their end-2025 PCE inflation forecast to 2.7%. The core PCE inflation forecast has likewise been revised upward, to 2.8%.
Market Reactions and Expectations
The daily chart RSI indicator is sitting just above the midline at 51. This depth indicates an alarming level of buyer intent, but places many markets in a tenuous position of cautious hope. The EUR/USD exchange rate fell below 1.0800 in early trading on Friday, unable to find any momentum after Wednesday’s gains. That’s a display of the market’s anxiety and risk averse to the PCE data print due to release this Friday.
They see signs of core PCE prices staying obstinately elevated, with a 0.3%-mo-m0 increase for the second month in a row penciled in for February.
“We look for core PCE prices to remain sticky, rising 0.3% m/m for a second month straight in February. Note that the core CPI rose a softer 0.23% m/m.” – TD Securities
This expectation is consistent with other analyses of the market. They project that headline annual PCE inflation will hold constant at 2.5% over this horizon.
Policy Implications and Federal Reserve Outlook
Federal Reserve Chairman Jerome Powell has emphasized caution in tightening monetary policy prematurely, especially if the inflationary pressures are expected to subside independently. He cautioned that some of the policy changes being advocated for might do more harm than good if the inflationary impulses start disappearing on their own.
“We will know in a couple of months if higher goods inflation in the first two months of the year was from tariffs,” – Jerome Powell
The updated SEP reveals a more prudent approach. Policymakers do foresee a further gradual decline in interest rates beginning in 2025, but this is conditioned on inflation trends reaching a sustainable path. The Fed’s decision to keep rates unchanged in March reflects a strategy aimed at balancing economic growth with inflation control.
PCE Data and Market Impact
The PCE inflation data is perhaps the most influential input to the tightly-watched market. It’s especially important because it shapes the Federal Reserve’s decisions on when to begin adjusting monetary policy. The expected increase in core PCE prices further highlights developing worries about the emergence of stickier inflation ferments throughout the economy.
FXStreet is not an investment advisor. They make clear that their analyses and insights — including those on PCE data — should not be seen as investment advice.