Testing the Waters

March 28, 2023 • Estimated Reading Time: 5 minutes

Macro Markets

PCE

After another lower CPI reported a few weeks ago, we are now eyeing the PCE report as the next big data point. While PCE is less significant than CPI, the Fed still considers the Core PCE to be the dominant inflation measure. This is because the PCE is a much larger area of measure covered and gauges the cost to Americans for the price of goods. Specifically, we will look for the Core quarter-over-quarter final and the year-over-year final metric as the values we want to see a decrease. Previously, the QoQ PCE was 4.7%, and YoY was 4.7%, with an expected value of 4.3% and 4.7%, respectively.

These forecasted results are considered somewhat disappointing, as inflation continues to be sticky in this environment. As mentioned before, Jerome Powell wants to see inflation come down to 2.0%. However, with the banking crisis that has taken place over the last few weeks, the job of the Fed has become much harder, as there is pressure to bail out banks, increase the budget sheet, and continue more quantitative easing to save the economy. This level of money injection would create much further lingering inflationary tendencies. On the bright side, we are still coming down from the peak of 6.0% PCE QoQ reading set in Q2 in 2021 and 5.4% YoY in early January 2022.

The biggest question moving forward is, “will the rate hikes that have been put in place take care of the inflation?” As we move into recession territory, the decision-making by the Fed will change, potentially preventing inflation from coming down further. Currently, the Fed discount window is below the value of the 2-year treasury note yield. Historically, when this occurs, we see a pivot and then cutting to proceed shortly after. If the Fed fund rate does not stay above the CPI levels for long enough, inflation will rear its ugly head back into existence, and inflation will look much more like how it did in the 1980s.

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