Fed officials continue to warrant caution on inflation, as eyes turn to US PCE data

  • Commentary from Fed officials on interest rates and inflation outlook will be closely scrutinized this week.
  • Fedspeak could help reverberate the market expectations for a September rates on-hold decision.
  • Fed rate outlook could significantly impact the value of the US Dollar across its major rivals.

Federal Reserve (Fed) policymakers are set to make their scheduled appearances on Tuesday, as full markets return, anticipating the release of the high-impact US PCE inflation due later this week.

Meanwhile, the US Dollar remains under moderate selling pressure so far this week, extending Friday’s downside, fuelled by an unexpected easing in UoM 5-year Consumer Inflation Expectations for May. The reading came in at 3.0%, down from April’s 3.1% and below the market consensus of 3.1%.

Markets are pricing in a 50% probability that the Fed will hold interest rates in September, according to the CME Group’s FedWatch Tool. In the past week, Fed policymakers leaned in favor of a cautious stance on the inflation outlook, raising concerns amongst the market participants on potential Fed rate cuts this year.

Looking ahead, in the early American session, Federal Reserve Bank of Minneapolis President Neel Kashkari speaks and participates in a panel before the Barclays-CEPR International Monetary Policy Forum. Later on, Fed Governor Lisa Cook and  San Francisco Fed President Mary Daly will take up the rostrum to share their thoughts at a panel discussion titled “AI and the Economy” at an event hosted by the Federal Reserve Bank of San Francisco.

Fed officials’ recent comments

Fed Governor Michelle Bowman noted on Tuesday that she “would have supported either waiting to slow QT pace or a more tapered slowing in balance sheet run off,” while adding that it is “important to keep reducing balance sheet size to reach ample reserves as soon as possible and while economy is strong.”

Meanwhile, Cleveland Fed President Loretta Mester did not touch upon the topic of monetary policy. She expressed her take on the Fed communications, noting that it “would be preferable for FOMC statements to use more words to describe the current assessment of the economy, how that influences the outlook and the risks to that outlook.”

However, in a CNBC News interview during the European hours, Minneapolis Fed President Neel Kashkari spoke on inflation and interest rate outlooks. Kashkari said that the Fed should wait for significant progress on inflation before lowering the policy rate, per Reuters. He also raised the possibility of the Fed hiking rates if inflation fails to cool down further. 

Economic Indicator

Personal Consumption Expenditures – Price Index (YoY)

The Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

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