Fed’s Preferred Inflation Gauge Is Set to Back Rate-Cut Patience

Fed’s Preferred Inflation Gauge Is Set to Back Rate-Cut Patience

Federal Reserve officials are about get further confirmation that inflation progress has stalled, supporting what appears to be a shift in tone to keep interest rates higher for longer than previously anticipated.

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(Bloomberg) — Federal Reserve officials are about get further confirmation that inflation progress has stalled, supporting what appears to be a shift in tone to keep interest rates higher for longer than previously anticipated.

Policymakers’ preferred inflation gauge — the personal consumption expenditures price index — probably stayed elevated in March, according to data due in the coming week. 

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The measure is seen accelerating slightly to 2.6% on an annual basis as energy costs rise. The core metric, which strips out energy and food, is expected to rise 0.3% from the prior month after a similar gain in February.

While the core PCE data may not be as strong as the consumer price index — which topped estimates and rattled markets earlier this month — Fed Chair Jerome Powell and other officials have signaled that it’ll take longer for them to gain the necessary confidence in a downward trajectory of inflation before cutting rates. 

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Read more: Fed Resets Clock on Cuts and Questions If Rates Are High Enough

Policymakers will observe the traditional public-speaking blackout period during the coming week, ahead of their two-day meeting that concludes May 1.

The fresh inflation numbers on Friday will be accompanied by March personal spending and income figures. Against a backdrop of healthy job growth, economists project another solid gain in household outlays for goods and services. Income growth is also forecast to accelerate.

  • For more, read Bloomberg Economics’ full Week Ahead for the US

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Other data for the week include the government’s initial estimate of first-quarter growth, which probably cooled from the prior period’s robust pace but still ran above what policymakers deem is sustainable in the long run.

A composite gauge of activity at manufacturers and service providers will also be released, as well as new-home sales. Later in the week, the University of Michigan will publish its final April reading of consumer sentiment and inflation expectations.

What Bloomberg Economics Says:

“Real GDP likely cooled to about a 2.7% pace in 1Q following 4.2% average growth in 2H23. That’s still above the longer-run sustainable pace of 1.8%, according to FOMC projections, suggesting persistent inflationary pressures. Looking forward, activity will be challenged by weakness in discretionary spending with consumers increasingly sensitive to prices amid elevated inflation.”

— Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists. For full analysis, click here

Looking north, the Bank of Canada’s summary of deliberations will shed more light on the debate between officials about what they want to see before cutting rates. Retail sales for February and a flash estimate for March may confirm signs of a consumer slowdown at the start of the year.

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Elsewhere, the Bank of Japan’s decision will be scrutinized for hints of future rate hikes, Turkish officials may keep borrowing costs on hold, Germany’s Ifo business index might signal improvement, and countries from Australia to Mexico are set to release inflation numbers.

Click here for what happened last week and below is our wrap of what’s coming up in the global economy.

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Asia

The BOJ will deliver its latest price forecasts, little more than a month after its first rate hike since 2007. 

With Japan’s central bank widely expected to keep policy on hold after mothballing its massive easing program, economists and investors will scrutinize the forecasts and the BOJ’s characterization of inflation risks for any hints on the pace of future rate hikes. 

Continued weakness in the yen will add an extra layer of tension when Governor Kazuo Ueda speaks at a briefing after Friday’s decision. 

The week kicks off with Chinese banks expected to keep their prime interest rates unchanged. 

Preliminary export figures from South Korea will provide a snapshot of the strength of world commerce. The trade-dependent nation releases its gross domestic product figures on Thursday, with the economy expected to have grown at the same clip as the previous four quarters. 

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Indonesia’s central bank is likely to keep borrowing costs unchanged at 6%. 

Singapore, Australia and Malaysia release inflation numbers during the week, with the monthly figures from Down Under expected to show the first acceleration since September.

  • For more, read Bloomberg Economics’ full Week Ahead for Asia

Europe, Middle East, Africa

European Central Bank President Christine Lagarde will deliver a speech on Monday at Yale University as she extends her US visit after the International Monetary Fund/World Bank meetings.

Back in Europe, several colleagues are scheduled to speak in the coming days. Among them will be ECB Executive Board members Isabel Schnabel and Piero Cipollone, and governors including Joachim Nagel, Francois Villeroy de Galhau and Fabio Panetta.  

Key euro-zone releases include consumer confidence on Monday, the initial results of monthly purchasing-manager surveys on Tuesday, and the ECB’s consumer-expectations survey on Friday. 

Among major economies, Germany’s Ifo business sentiment index on Wednesday will be a highlight at a time when policymakers are observing a turn for the better in Europe’s largest economy after a period of stagnation and contraction.

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Tuesday is set to be busy in the UK. PMI numbers will be released in tandem with those of the euro zone, and the latest public finance data are due then too. Bank of England Chief Economist Huw Pill and fellow policymaker Jonathan Haskell are scheduled to speak that day.

  • For more, read Bloomberg Economics’ full Week Ahead for EMEA

The Swiss National Bank will hold its annual general meeting on Friday, a day after releasing earnings. The event attracted climate activists in the past, and they could be motivated this time by a parliamentary vote endorsing the central bank’s position not to take environmental risks into account in its monetary policy.

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South Africa’s central bank on Tuesday will publish its biannual monetary policy review, providing guidance on its inflation and interest-rate outlook. 

Several monetary decisions are scheduled around the wider region:

  • On Tuesday, Hungary is poised to further slow cuts to the European Union’s highest rate as officials confront multiple risks while trying to shield the volatile forint.
  • Two days later, Ukraine’s central bank will set policy in the wake of slowing inflation.
  • Also on Thursday, Turkish officials may keep the key rate at 50% after a surprise hike last month. Some analysts aren’t ruling out another increase if policymakers see the inflation outlook deteriorating from the peak they see of around 75% in the coming months.
  • On Friday, the Bank of Russia is set to maintain its rate at 16% after officials signaled “a long period” of tight monetary conditions this year amid persistently high inflation and worsening foreign trade due to sanctions.
  • The same day, Botswana is predicted to keep borrowing costs unchanged, with inflation below its 3% to 6% target range.

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Latin America

In Mexico, early-April inflation data is likely to boost speculation that Banxico will pause at its May meeting, as analysts expect that the mid-month print pushed back up over 4.5%.

Also on tap are February GDP-proxy figures, very possibly showing a fifth straight month-on-month decline, and the March labor market report.

On the monetary policy front, Paraguay’s central bank is seen trimming borrowing costs for a ninth straight meeting, to 5.75%, before taking a breather at its May gathering. 

Argentina reports its monthly budget results for March, following consecutive surpluses in January and February on the back of President Javier Milei’s so-called shock therapy economic measures. Analysts expect that same austerity to weigh on the February GDP-proxy data after January’s deeply negative print.

In Brazil, the central bank’s survey of analysts will likely show further erosion of inflation expectations following the government’s proposal to water down its budget targets.

Latin America’s biggest economy will also serve up its March current account report, foreign direct investment, tax collections, and banking lending data, along with its mid-month inflation report.

The early consensus sees a sub-4% reading, well within the 1.5%-to-4.5% tolerance range but still well over the 3% target.

  • For more, read Bloomberg Economics’ full Week Ahead for Latin America

—With assistance from Robert Jameson, Paul Jackson, Piotr Skolimowski, Monique Vanek, Beril Akman and Tony Halpin.

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