Interest rate cut in May on the cards after Fed’s preferred measure of inflation cools to 2.9%

The Federal Reserve’s favorite inflation gauge showed continued progress toward the central bank’s target of returning price growth to 2 percent.

Prices are no longer rising as much as they used to, which is good news for your weekly shopping, but it also has other benefits.

Falling inflation is also boosting stock prices, which is good for Americans’ 401(K) balances.

Stock markets like lower inflation because it increases the likelihood that the Fed will cut interest rates – which encourages consumers to spend money and also makes it cheaper for businesses to borrow money.

The core index for personal consumption expenditure rose by 0.2 percent on a monthly basis and by 2.9 percent on an annual basis in December. The monthly increase was as expected, and the annual increase was below the expected 3 percent.

Analysts said: ‘There is plenty of room for the Fed to start cutting rates soon.

Customers wait for orders at a supermarket in Wheeling, Illinois, Friday, January 19, 2024. On Friday, the Commerce Department will release its December report on consumer spending. (AP Photo/Name Y. Huh)

Today’s inflation figures came after more good news yesterday, when it was reported that the US economy grew much faster than expected in the final three months of last year, beating expectations as consumers and businesses continued to spend.

For the average American, their biggest exposure to the stock market is likely their retirement plan, as most 401(K) accounts have some money invested in these benchmark indices.

Stocke’s rally – as is the case this year – is good news, because it means their portfolios are likely to recoup significant losses from 2022, when the S&P 500 ended the year down 20 percent.

America easily missed a recession – which many analysts had predicted was inevitable.

“The bigger picture is that evidence of a sustained return of inflation to the Fed’s target is mounting,” analysts at Pantheon Macroeconomics said in a note, expecting inflation data to lead to a 150 basis point rate cut this year to lead.

“Core PCE inflation has now been running at an annualized pace for seven months, in line with the Fed’s 2% target,” Andrew Hunter, deputy chief economist at Capital Economics, said in a note to clients.

“This reiterates the message that there is essentially no ‘last mile’ of disinflation to be achieved and that, even with real economic growth still resilient, there is plenty of room for the Fed to start cutting rates soon.” .’

Traders now see a 90 percent chance that the Fed will make its first rate cut in May, according to CME Group’s FedWatch Tool, up from previous expectations in March.

The S&P 500 closed at an all-time high for the fifth straight session on Thursday, after data reflecting strong economic growth in the fourth quarter overturned gloomy predictions of a recession in the wake of the Fed’s rapid rate hikes.

All three major indexes are poised for their third straight week of gains, marking their twelfth weekly gain out of thirteen.

Friday’s dovish inflation data came a day after government figures showed the economy was rising grew at a surprisingly strong annual rate of 3.3% in the last three months of last year.

Solid consumer spending boosted growth, capping a year that started with widespread expectations of a recession. Instead, the economy grew by 2.5% in 2023, up from 1.9% in 2022.

The US central bank is expected to keep its policy rate unchanged at its current range of 5.25 percent to -5.50 percent at its meeting next week. Since March 2022, the Fed has raised the overnight rate by 525 basis points.

Declining inflation increases household purchasing power, boosting consumer spending and the overall economy.