Fed's Preferred Inflation Gauge Rose 2.8%, as Expected
Personal Consumption Expenditures Price Index (PCE), the Federal Reserve's key inflation metric, climbed 2.5% on an annual basis in February, the Commerce Department reported Friday. Core PCE inflation, which strips away more volatile food and energy costs, rose 2.8%, in line with analyst expectations.
Month over month, PCE jumped 0.3% from the previous month, less than the 0.4% increase that analysts expected. The monthly rate also cooled slightly January's 0.4% month-over-month rise. Core PCE also rose 0.3% on a monthly basis.
While core inflation came in as expected, markets will have to wait until Monday to react as both stock and bond markets are closed for the Good Friday holiday. Though inflation has cooled since this time last year, today's report wasn't enough to raise hopes that the U.S. central bank would slash interest rates at its next meeting in May. Markets still forecast a nearly 96% chance that the Fed will hold rates steady at it's next interest rate decision meeting.
The U.S. Commerce Department report comes just two weeks after the Consumer Price (CPI) and Producer Price (PPI) indexes also showed inflation remaining stubbornly high. The data coupled with a robust job market, which heightens the risk of inflation by raising wages, worried the Fed and derailed market expectations for a rate cut early this year. While the Federal Reserve considers both inflation reports in making interest rate decisions, PCE remains the Fed's preferred inflation gauge.
FOMC Leaves Rate Unchanged
Last week, the bank's Federal Open Market Committee, which sets monetary policy, left the rate unchanged at 5.25% to 5.50% where it's stood since July when it raised the rate a quarter point. That increased capped a 15-month prescription of hikes designed to ground soaring inflation, which rose to 9% in mid 2022.
The Fed is hoping to reduce inflation to 2% annually, but it has lingered over 3%, largely the result of high prices for energy, goods and some services.
In his semiannual testimony before Congress earlier month, Fed Chair Jerome Powell said that the bank would likely cut rates this year but only after it "gained greater confidence that inflation is moving sustainably toward 2 percent."
Powell noted cautiously that "the economic outlook is uncertain, and ongoing progress...is not assured."
In announcing its latest decision, the Fed reiterated its concerns about the economy and said it would "carefully assess incoming data, the evolving outlook, and the balance of risks" in future rate decisions.