The Feds Quagmire: Two Steps Forward and Two Steps Back as PCE Rises in April

The Federal Reserve’s Quagmire: Inflation’s Persistence and Interest Rate Dilemma

The BLS (Bureau of Labor Statistics) released the latest data on inflation, the personal consumption expenditures price index (PCE price index) for April 2023 today. Inflation rose by 0.4% last month, an increase of 4.7% compared to a year ago.

The key takeaway from today’s PCE report is that Inflation remains entrenched in the U.S. economy and has had no effect in reducing consumer spending. On the contrary, consumer spending rose 0.8% in April with personal income increasing only 0.4%. This reinforces the assumption that interest rates will remain elevated for a longer time.

Right after the report was released the CME’s Fedwatch tool quickly rose to a 70.5% chance that the Fed will raise rates by a quarter percent at the June FOMC meeting. A far cry from recent statements by Chairman Powell at a Fed in mid-May. The chairman said that the central bank terminal rate has become elevated to a point where its effect on consumers and businesses is high enough to restrain borrowing spending and contract economic growth.

“Having come this far, we can afford to look at the data and the evolving outlook and make careful assessments.”

Just one week ago the CME’s FedWatch tool predicted that there was a 17.4% probability that the Federal Reserve would raise rates at the next FOMC meeting in the middle of June. Just yesterday the probability climbed to 51.7% and is now at 70.5%. One week ago it was predicting an 82.6% probability that the Federal Reserve would enact its first rate hike pause in 15 months.

A quagmire can be defined as an awkward, complex, or hazardous situation, or as a difficult and dangerous situation that is hard to deal with or get out of. It is the perfect definition of the position the Federal Reserve is currently in. The Fed has been focused on reducing inflation to a target of 2%, considered by many to be unrealistic and improbable that can be achieved at all.

Add to that it seems as though actions by the Federal Reserve are lowering inflation two steps forward as the report reveals inflation is taken two steps back.

Recent statements by Chairman Powell that their actions have had a dramatic effect and consumer spending with the result of restraining spending borrowing and contracting economic growth to an acceptable level are far from the truth.

Gold Price Today

Market participants who trade in investing gold seemed stunned as today’s news on higher inflation created a mixed message of higher inflation and higher interest rates at the same time. Gold futures gained a paltry $2.40 after declining $40 on Wednesday and Thursday. As of 6 PM EDT gold futures are currently fixed at $1946.10 with a decline of only 0.12%, nothing compared to the strong weekly decline.

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Wishing you as always good trading,

Gary S. Wagner