Fed Cautions on Rate Reductions as Inflation Rebounds in March, Suggesting Economic Expansion Despite High Prices

The PCE inflation index, which is the preferred indicator of the US central bank, showed that inflation rebounded in March. This data was released just before the bank’s next meeting, which is expected to encourage caution before any rate reductions. Inflation accelerated to 2.7% year-on-year in March, up from 2.5% in February, according to the Commerce Department. Analysts had predicted a more modest figure of 2.6%. However, monthly inflation remained stable at 0.3%.

Even core inflation, which excludes volatile food and energy prices, saw higher growth than expected in both on a quarterly and trend basis. Household incomes also grew stronger by 0.5% compared to February’s increase of 0.3%, while spending remained unchanged with a monthly increase of 0.8%. These data suggest that the economy is expanding despite high inflation rates.

The Federal Reserve aims to bring down the PCE inflation index to 2%, and this rebound should encourage caution and patience as they maintain current interest rates at 5.25-5.50% for longer to avoid further price increases. The Fed’s efforts to reduce inflation are evident in slowing economic growth in the first quarter as GDP fell to its lowest level in almost two years due to their interest rate hikes.

Federal Reserve chair Jerome Powell has warned that achieving sustainable inflation levels may take longer than expected and markets are now anticipating a rate cut in September or November instead of June as previously expected due to a lively job market and low unemployment rate