Fed's Favorite Inflation Gauge Rises More Than Expected In February, Casting Doubt On Near-Term Rate Cuts

The Federal Reserve's preferred inflation gauge rose more than anticipated in February, underscoring the bumpy road back to the 2% target and throwing cold water on expectations for imminent interest rate cuts.

According to data released Friday by the Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) price index increased by 2.5% year-over-year, matching both the previous reading and economist forecasts of 2.5%. On a monthly basis, headline PCE rose 0.3%, in line with estimates.

Stripping out volatile food and energy prices, the core PCE price index—the Fed's favorite metric for inflation—climbed 2.8% from a year ago, slightly up from January's upwardly revised 2.7% and above expectations of 2.7%.

The monthly core PCE figure accelerated to 0.4%, surpassing the 0.3% consensus estimate.

The hotter-than-expected inflation data could potentially dent market optimism for near-term monetary easing.

Before the release, fed futures markets had priced in a roughly 70% probability of a rate cut by June and cumulatively 63 basis points of cuts by December, according to CME FedWatch data.

In a sign of consumer resilience despite sticky inflation, personal spending bounced back in February, rising 0.4% month-over-month after a 0.3% contraction in January, but missing expectations for a 0.5% increase.

Personal income growth accelerated to 0.8%, above January's 0.7% and well beyond the 0.4% estimate.

Market Reaction: Wall Street Flashes Red Lights

Futures on major U.S. stock indexes fell in premarket trading Friday. The S&P 500 contracts slid 0.4%, the Nasdaq 100 dropped 0.5%, and Dow Jones futures declined 0.2%. Premarket moves pushed the SPDR S&P 500 ETF Trust ( SPY ) near the flatline for the week.

The U.S. dollar index – as tracked by the Invesco DB USD Index Bullish Fund – slightly trimmed session gains, up 0.1%.

In the bond market, yields remained broadly steady. The 2-year Treasury yield – a gauge for interest-rate expectations – hovered around 4%.

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Image created using artificial intelligence via Midjourney.