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Economists, pundits and market participants await Friday’s core PCE report

Financial markets are currently in the process of factoring in or prepping for the upcoming release of the core PCE (Personal Consumption Expenditures) report. On Friday, the Bureau of Economic Analysis (BEA) will release the latest inflation data for December. Current estimates predict a continued decline in core inflation from 4.7% in November to 4.4% (y/y) last month.

This is welcome news for Americans, but more importantly, it is the last critical economic report the Federal Reserve will have available as it meets to decide the pace and size of upcoming interest rate hikes. Although members of the Federal Reserve have expressed mixed messages regarding their views on the pace of upcoming interest rate hikes, as well as their goal to bring their benchmark “fed funds” rate upward. It is currently widely accepted that the Fed will raise rates by ¼%, the first small rate hike since their first rate hike in March of last year.

The Federal Reserve has held rates between 0 and ¼% since 2018. That ended in March 2022 when the Federal Reserve raised rates by ¼%. That followed a series of extremely aggressive ½ percent rate hikes in May. This was followed by four consecutive increases of ¾% in June, July, September and November. Finally, in December they only raise rates by half a percent. Collectively, the seven consecutive rate hikes have lifted interest rates from near zero to between 4 ¼ and 4 ½%.

The Federal Reserve is widely expected to slow the pace of rate hikes with a ¼% hike during the January FOMC meeting. CME’s FedWatch tool currently forecasts that there is a 99.7% chance that the Fed will raise rates by just ¼% and a 0.3% chance that the Fed will raise rates by ½%. The Federal Reserve is also on record in its latest economic projections released in December of last year that it expects to take its benchmark rate just above 5% and not cut that level throughout the year and possibly into the first or second quarter 0f 2024.

According to Investing.com, the US core PCE index was at 4.7% (year-over-year) in November and is expected to decline to 4.4% in December. This clearly illustrates that the Federal Reserve’s aggressive monetary policy has effectively reduced inflation throughout 2022. However, the Federal Reserve’s latest economic report released at the December FOMC meeting made it clear that they do not intend to cut interest rates for the entire calendar year of 2023.

The Federal Reserve was slow to react and made a huge mistake by not raising rates until March 2022. Back then headline inflation was at 8.5%. With headline inflation at 2.6% exactly a year earlier, the decision not to raise rates was one of the worst miscalculations by any Federal Reserve in history. However, the Fed’s aggressive interest rate hikes last year, while extremely painful, were correct and dramatically reduced inflation.

The question now is whether the Federal Reserve will abandon its stance of keeping interest rates at this elevated level throughout the year, or become data dependent again and reposition policy based on this new data that has effectively set a dent in inflation.

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I wish you good trading as always,


Disclaimer: The views expressed in this article are those of the author and may not reflect the views of the author Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither did Kitco Metals Inc. nor can the author guarantee such accuracy. This article is for informational purposes only. It is not a solicitation of any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept responsibility for losses and/or damages arising from the use of this publication.

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