The Federal Reserve’s favorite inflation reading, the Personal Consumption Expenditures price index, is expected to rise 2.6% for the 12 months ended in March. Investors are eagerly awaiting this report following weaker-than-expected first-quarter US GDP growth, which rose at an annualized rate of 1.6%, the slowest pace of growth since the second quarter of 2022. The quarterly PCE index showed a rise of 3.4% and 3.7% for headline and core respectively from the year before, fueling fears of stagflation. The Fed has warned that it will not cut rates until inflation comes down closer to its 2% target, even if growth slows sharply.
Wall Street initially expected multiple rate cuts from the Fed in 2024; however, projections now show only one rate cut in the second half of the year. The labor market and consumer spending continue to show resilience, providing support for the economy despite the softer GDP reading in the first quarter. Some analysts suggest that one GDP report is not enough to establish a trend and that more data is needed. The Fed may face a dilemma if the March PCE index comes in higher than expected, as it could be pressured to make more rate hikes to combat stubbornly high inflation.
US Treasury Secretary Janet Yellen believes that the US economy is “firing on all cylinders” and inflation is on track to normalize. Yellen made these comments in an interview with Reuters, where she stated that the economy is performing well and the labor market is the strongest in 50 years. Despite the slower-than-expected GDP growth in the first quarter, Yellen mentioned that underlying measures of growth were strong in the report. The economy continues to show strength, and Yellen does not see it as overheated.
Pending home sales based on contract signings unexpectedly rose in March, despite higher mortgage rates that month. Mortgage rates reached a five-month high this week, according to Freddie Mac’s latest data. The National Association of Realtors reported a 3.4% increase in pending home sales in March, which exceeded economists’ forecasts. Despite the gain, pending home sales remain within a narrow range over the last 12 months, indicating that significant gains will require declining mortgage rates and increasing inventory. The housing market began the year with momentum, but the narrative has since shifted due to rising mortgage rates.
In summary, the US economy is facing challenges such as slower GDP growth, high inflation, and rising mortgage rates. The Fed’s upcoming rate decisions will be crucial in navigating these issues, especially if inflation continues to remain stubbornly high. Analysts are closely monitoring economic indicators to gauge the overall health of the economy and determine the appropriate policy responses. Despite concerns, there are still signs of strength in the labor market and consumer spending, providing some stability to the economy. Janet Yellen’s optimism about the economy’s performance adds another perspective to the ongoing discussion about the future path of the US economy.
