Random Thoughts

U.S. equity prices resumed their upward trajectory when investors concluded that the Fed was finished raising rates for the year.

Now, some go so far as to claim that the Fed will initiate a new rate-reduction cycle later this year, pointing to the inability of inflation to rise along with economic growth. Indeed, while last week’s Consumer Price Index (CPI) report for March delivered an as-expected gain in headline inflation, it revealed a core increase that was softer than estimated.

What’s more, their rest-of-year inflation outlook remains benign, with headline and core inflation averaging 2.1% and 2.2%, respectively, in the final quarter of the year. For the Personal Consumption Expenditure (PCE) chain price figures, the Fed’s favorite inflation indicator.

Headline and core PCE measures are obviously well below the desired target of around 2.0% and AE projects them to rise to only 2.0% and 1.9%, respectively, by year end. Even with the slight pick-up in inflation expectations, history implies that current and end-of-year differentials between interest rates and inflation are not high enough to warrant the start of a new rate-cutting cycle by the Fed.