February’s Personal Consumption Expenditures (PCE) showed that headline inflation rose 0.3% from January, with the year-over-year reading up from 2.4% to 2.5%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, rose by 0.3% monthly. The year-over-year reading fell from 2.9% to 2.8%, pushing this important metric one step closer to the Fed’s 2% target and its lowest level in almost three years!
What’s the bottom line? The Fed has been working hard to tame inflation, hiking its benchmark Fed Funds Rate (which is the overnight borrowing rate for banks) eleven times between March 2022 and July 2023. These hikes were designed to slow the economy by making borrowing more expensive, lowering the demand for goods, and thereby reducing pricing pressure and inflation.
The Fed wants to see annual inflation as measured by Core PCE return to its 2% target, though they’ve indicated they won’t “wait to get to 2% to cut rates.” While the latest 2.8% Core PCE reading is much lower than the 2022 peak of 5.6%, progress has been slowing. So, the question remains: When will the Fed think inflation has progressed low enough for them to start cutting the Fed Funds Rate later this year?