Wrong direction Wrong direction http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\article\mmdt-weekly-Small.jpg May 25 2023 May 30 2023

Wrong direction

Weekly Cash Commentary

Published May 30 2023

The Federal Reserve loves the Personal Consumption Expenditures Index (PCE) but probably won’t like its May reading. The economic metric, that monetary policymakers prefer over the more widely followed Consumer Price Index, took a step in the wrong direction last month, the Labor Department reported on Friday. Its annualized growth rate of 4.4% was higher than the 4.2% in April. More distressing is that core PCE, which removes volatile energy and food prices, mimicked this with 4.7% growth in May compared to 4.6% in April. Both increased 0.4% month over month. The fact that annualized core remains higher than headline is particularly concerning. It intimates that some of the decline in the latter is due to falling gasoline prices, which are about $1 below where they stood around Memorial Day last year, but could easily increase again based on supply and demand of oil.

This turn of events complicates decision-making at the June Federal Open Market Committee (FOMC) meeting. The messages put forth by Fed speakers over the last two weeks were balanced between holding the fed funds target range at 5-5.25% and raising it another 25 basis points. But one wonders if the PCE retracement will change minds. While it makes sense for policymakers to take a pause to assess the impact of its aggressive tightening campaign, their commitment to quelling inflation might demand another hike. What’s good news for liquidity products, whose yields usually follow rate moves (though past performance doesn’t guarantee future results), likely is bad news for the rest of the investment market and economy if the FOMC reacts with a hike to slow the economy.

Tags Liquidity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

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