Weak Inflation May Lead Fed to Cut Interest Rates

Weak Inflation May Lead Fed to Cut Interest Rates

$USD, $SPY, $QQQ, $DIA

FLASH: Slowing inflation may lead the Fed to cut interest rates, White House economic adviser Larry Kudlow said in a TV interview Monday.

“The Fed is independent, but they have been themselves talking about coming and lowering their inflation target, which might mean a lower interest rate adjustment on their own timetable,” Mr. Kudlow said.

Earlier, the government said US consumer spending increased by the most nearly 10 years in March as households stepped up purchases of motor vehicles, but price pressures remained muted, with a Key inflation measure posting its smallest annual gain in 14 months.

The surge in consumer spending reported by the Commerce Department on Monday sets a stronger base for growth in consumption heading into Q-2 after it slowed sharply in Q-1 of this year.

It further allayed concerns about the economy’s health, which had been brought to the fore by an inversion of the US Treasury yield curve last month. Tame inflation supported the Fed’s recent decision to suspend further interest rate increases this year.

Fed officials are scheduled to meet Tuesday and Wednesday to assess the economy and deliberate on the future course of monetary policy. In March the Fed dropped forecasts for any interest rate increases this year, halting a 3-year policy tightening campaign.

Consumer spending, which accounts for more than 70% of US economic activity, spiked 0.9% the biggest rise since August 2009 and was also driven by increased healthcare expenditures.

March’s surge in real consumer spending suggested an acceleration in consumption was likely in Q-2. The overall economy grew at a 3.2% rate recent Quarter.

USD was little changed Vs a basket of peer currencies, while US Treasury prices fell. Stocks on Wall Street rose, lifting the S&P 500 and the NAS Comp to record highs.

In March, spending on goods rebounded 1.7%, with outlays on long-lasting manufactured goods such as cars + 2.3%. Spending on goods fell 0.5% in February. Outlays on services increased 0.5% last month, driven by healthcare spending, after rising 0.4% in February.

Inflation was nil, with the PCE price index excluding the volatile food and energy components unchanged in March after edging up 0.1% in February. That lowered the Y-Y increase in the so-called core PCE price index to 1.6%, the smallest increase since January 2018, from 1.7% in February.

The core PCE index is the Fed’s preferred inflation measure. It hit the central bank’s 2% inflation target in March last year for the 1st time since April 2012.

The low inflation readings has the attention of the White House, where President Trump has railed against the Fed for tightening monetary policy.

President Trump has called for rate cuts, Tweeting earlier this month that there was “almost no inflation.”

The Trump Administration blamed the economy’s fall at the turn of the year on the Fed’s rate hikes.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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