The Federal Reserve's favorite inflation reading is due Friday morning. For Wall Street, the stakes are high.
The Personal Consumption Expenditures price index is expected to rise 2.6% for the 12 months ended in March, according to FactSet estimates. The core PCE index, which excludes the more volatile energy and food categories, is expected to rise 2.7% from the prior year.
Investors are nervously awaiting the report after first-quarter US GDP came in softer than expected on Thursday. Gross domestic product, which measures all the services and goods produced in the economy, rose at an annualized rate of 1.6% during the first three months of the year, the Commerce Department reported.
That's the weakest pace of growth since the second quarter of 2022, when the economy contracted, and well below the Atlanta Fed's estimate of a 2.7% gain.
A slowing economy should help slow inflation and offer support for the Fed to start easing interest rates. But the Commerce Department report didn't reflect that. It showed that the quarterly headline and core PCE index rose 3.4% and 3.7%, respectively, from the year before.
Stocks tumbled as the slowdown in GDP, coupled with the stubbornly high inflation data, stoked fears of stagflation. That's when the economy sees weak growth while inflation runs high. In a stagflationary environment, prices for things from gas at the pump to food at the grocery store continue rising while people's means to spend decreases.
The Fed has warned that it doesn't plan to cut rates until inflation comes down closer to its 2% goal, even if growth slows sharply. The central bank is responsible for stabilizing prices and maximizing employment, not specifically boosting growth. Some officials have even suggested another rate hike could be in order if inflation doesn't cool down, which could pressure the economy further.
If the March PCE index comes in hotter than expected, "the Fed's going to be stuck between a rock and a hard place," said Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group.
Traders project that the Fed, whose May policy meeting takes place next week, will make just one rate cut during the second half of 2024, according to the CME FedWatch Tool. Wall Street earlier this year expected that the central bank would ease rates as many as six times in 2024, beginning in March.
Still, some analysts say that one GDP report isn't yet cause for concern, since more cool data would be needed to establish a trend. Plus, the labor market continues to show remarkable resilience, as does Americans' spending power, providing pillars of support for the economy.
"The bottom line is that the economy moderated somewhat in the first quarter, but it remains on solid footing overall," wrote Bank of America economists in a note.
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