The Federal Reserve’s cautious approach to interest rate policy over the past year has translated to an ethos of constantly following the data. But with Friday’s PCE reading showing that March prices increased more than Wall Street expected, it’s likely officials will “wait and see” for yet another batch of economic data.
“When it comes to inflation, the Fed can’t catch a break,” analysts at Bank of America Global Research said in a note Friday. “At next week’s May FOMC meeting, we think the Fed will take a wait-and-see approach to cuts while giving policy more time to work.”
The core PCE index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 2.8% over the prior year in March. That was above estimates for 2.7% and unchanged from the annual increase seen in February.
The latest in a string of hotter-than-expected reports has cooled expectations of an imminent rate cut. Fed chair Jerome Powell has emphasized that the central bank won’t cut rates until officials are confident of inflation’s decline.
Still, some analysts, like many investors, are undeterred by the idea of higher-for-longer interest rates.
“We’re still optimistic on the market, however, as we believe that rate cuts aren’t necessary for the bull market to continue,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note on Friday. “Instead, continued economic expansion and growth in corporate profits – which are already seeing from the largest companies in the market – are what will propel stock prices to new highs.
He added: “Just be aware that volatility around the election, geopolitical events and even future inflation data is likely; it’s not going to be a smooth ride this year.”
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