Fed Kicks Off 2-Day Meeting As Inflation Target Is Achieved In March: Trade On!

The “big news”, maybe, headline yesterday was delivered through the Personal Consumption and Expenditures (PCE) data. The inflation gauge rose to a 12-month rate of 2%, hitting the Federal Reserve’s target for the first time in nearly a year. The 12-month increase in core rate of inflation was close behind, rising to 1.9% in March from 1.6% in the prior month. That’s the biggest yearly gain in the core rate since April 2012. The PCE index was unchanged in March. The core rate rose 0.2 percent.

The inflation figures are included in the government’s monthly report on consumer spending. Outlays/Spending rose 0.4% last month, the first increase since the end of 2017. Incomes climbed 0.3% in March and in line with expectations. Rising incomes are helping consumer sentiment that is feeding through to purchasing power, but consumers did dip into their savings in March. The savings rate dropped to 3.1% from 3.3 percent.

The PCE data comes shortly after last weeks first look at Q1 2018 GDP, which rose at a 2.3% pace and above economists’ expectations of 2 percent. Within the reported data was a rise in labor cost. The employment cost index rose 0.8% in the first quarter, a tick above the MarketWatch estimate. The cost of worker compensation in the form of pay and benefits climbed to yearly rate of 2.7%, the biggest gain since 2008. Although the pace of wage increases is rising in a tightening labor market, it is still at relatively low levels especially when considering the stage of the economic cycle.

What the data all points to, GDP and PCE, is the likelihood of the Fed to raise rates 4 times instead of 3 times in 2018. Basically 1-quarter point rate hike each quarter. This was the widely feared projection of analysts that came into question during the month of February and as the January Nonfarm payroll report showed a spike in wages. It’s become more a reality recently as the inflation data, tame as it may be, is achieving the Fed’s target.

“Core prices “won’t sustain” that first-quarter pace, which is partly a rebound from sluggish numbers late last year. Ian Shepherdson, chief economist at Pantheon Macroeconomics.”